Exam 7: Asset Pricing Models

Assume that as a portfolio manager the beta of your portfolio is 1.4 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

A study by Chen, Roll, and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT) EXCEPT

Which of the following is NOT a major difference between the capital market line (CML) and the capital asset pricing model (CAPM)?

A stock has a beta of 1.25. The risk-free rate is 5 percent and the return on the market is 6 percent. The estimated return for the stock is 14 percent. According to the CAPM, you should

Beta can be thought of as indexing the asset's systematic risk to that of the market portfolio.

Securities with returns that lie above the security market line are undervalued.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Jonathan Crowley is a portfolio manager for a large pension fund. Last year his portfolio had an actual return of 12.6 percent with a standard deviation of 13 percent and a beta of 1.3. The market risk premium for this period of time was 6 percent, and the risk-free rate of return was 5 percent. -Refer to Exhibit 7.6. Based on the Capital Asset Pricing Model (CAPM), what is the required rate of return for this portfolio?

The APT assumes that capital markets are perfectly competitive.

Using the S&P index as the proxy market portfolio when evaluating a portfolio manager relative to the SML will tend to underestimate the manager's performance.

Which of the following is not a step required for a multifactor risk model to estimate expected return for an individual stock position?

The excess return form of the single-index market model is

Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5 percent and the expected return on the stock index is 15 percent. The estimated return on the asset is 20 percent. Calculate the alpha for the asset.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return ( $\lambda$ 0) = .025 and the risk premiums for the two factors are ( $\lambda$ 1) = .12 and ( $\lambda$ 0) = .10. -Refer to Exhibit 7.10. Calculate the expected returns for stocks A, B, and C. A B C

Arbitrage Pricing Theory (APT) specifies the exact number of risk factors and their identity.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas). The zero-beta return ( $\lambda$ 0) = 3 percent, and the risk premia are $\lambda$ 1 = 10 percent and $\lambda$ 2 = 8 percent. Assume that all three stocks are currently priced at $50. -Refer to Exhibit 7.9. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that achieves this has 50 percent in stock X, -100 percent in stock Y, and 50 percent in stock Z. The weighted exposure to risk factor 2 for stocks X, Y, and Z are

Calculate the expected return for E Services, which has a beta of 1.5 when the risk-free rate is 0.05 and you expect the market return to be 0.11.

Under the following conditions, what are the expected returns for stocks Y and Z?

The expected return for a stock, calculated using the CAPM, is 10.5 percent. The market return is 9.5 percent, and the beta of the stock is 1.50. Calculate the implied risk-free rate.

Correlation of the market portfolio and the zero-beta portfolio will be linear.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. The average true return is