Exam 7: Capital Pricing and Arbitrage Pricing Theory

You consider buying a share at a price of $25. The share is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the share in one year for $28. The share's beta is 1.1, rf is 6% and E[rm] = 16%. What is the share's abnormal return?

Two investment advisors are comparing performance. Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2. If the T-bond rate was 5% and the market return during the period was 13%, which advisor was the better share picker?

The graph of the relationship between expected return and beta in the CAPM context is called the ________.

If enough investors decide to purchase shares they are likely to drive up share prices thereby causing ________ and ________.

Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the share is ________.

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible? Consider each situation independently and assume the risk-free rate is 5%.

Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a share with an expected return of 17%?

The measure of unsystematic risk can be found from an index model as ________.

The SML is valid for ________ and the CML is valid for ________.

In his famous critique of the CAPM, Roll argued that the CAPM ________.

According to the capital asset pricing model, ________.

The expected return on the market is the risk-free rate plus the ________.

One of the main problems with the arbitrage pricing theory is ________.

What is the expected return on a share with a beta of 0.8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

According to the CAPM, investors are compensated for all but which of the following?

Beta is a measure of ________.

Liquidity is a risk factor that ________.

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM ________.

In a simple CAPM world which of the following statements is/are correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world II. Investors' complete portfolio will vary depending on their risk aversion III. The return per unit of risk will be identical for all individual assets IV. The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio