Exam 12: Risk/Return and Asset Pricing Models

The ________ is a special case of the ________.

Which of the below reasons is NOT a reason an APT advocate would offer in support of the APT over either the CAPM or the multifactor CAPM?

Based on numerous experiments, psychologists demonstrated that the actions of decision makers are inconsistent with the assumptions made by ________.

The use of variance of returns in standard portfolio theory depends on whether the return distribution is symmetric with fat-tails.

Explain the concept of framing.

In designing a portfolio, investors seek to maximize the expected return from their investment, given some level of risk they are willing to accept. Portfolios that satisfy this requirement are called ________ portfolios.

The level of returns expected from any asset (which may be an individual security or a portfolio of securities) is an exponential function of the risk-free rate, the asset's beta, and the returns expected on the market portfolio of risky assets.

Explain how diversification can help investors realize their investment goal of maximizing return while minimizing risk. In your answer give an estimate of how many stocks are needed to achieve your investment goal.

Objections to the fully rational approach are that the ________.

Consider an investor who owns two assets: the risky market portfolio where the investor puts two-thirds of her money and a riskless asset where the investor puts one-third of her money. What is the beta of her portfolio?

The multifactor CAPM posits that extra-market factors influence expected returns on securities or portfolios.

Which of the below statements is FALSE?

In the multifactor CAPM, besides investing in the market portfolio, investors will also allocate funds to something equivalent to a mutual fund that ________.

An repelling feature of the APT model is that it makes few assumptions about investors and the structure of the market.

________ will not systematically affect the portfolio return, but it will reduce the variability (standard deviation) of return with this variability reduced when there is ________ among security returns.

Supporters of the APT model argue that it has several major advantages over the CAPM or the multifactor CAPM. Describe two of these advantages.

The arbitrage pricing theory (or APT) model postulates that a security's return is a function of several factors and the security's sensitivity to changes in each of them.

The CAPM can be extended to describe "extra-market" sources of risk referred to as factors, so as to create an extended model called a ________.

The relevant risk of any individual security is not total variability in returns but rather systematic variability, which is that portion of total variability that cannot be eliminated by combining it with other securities in a diversified portfolio.

The index of the sensitivity of a security's returns to movement in the market is the security's standard deviation, which can be estimated with regression techniques from historical data.