Question 1

Cho, Elton, and Gruber tested the APT by examining the number of factors in the return generating process and found that

Accepted Answer

A)  five factors were required using Roll-Ross procedures. 
B)  six factors were present when using historical beta. 
C)  fundamental betas indicated a need for three factors. 
D)  All of these are correct. 
E)  None of these are correct. 
A)  five factors were required using Roll-Ross procedures. 
B)  six factors were present when using historical beta. 
C)  fundamental betas indicated a need for three factors. 
D)  All of these are correct. 
E)  None of these are correct.

Question 2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 3 percent and the market return to be 8 percent. You also have the following information about three stocks.
  
-Refer to Exhibit 7.2. What are the expected (required) rates of return for the three stocks (in the order X, Y, Z)?

Accepted Answer

A)  16.50 percent, 5.50 percent, 22.00 percent 
B)  9.25 percent, 10.5 percent, 7.5 percent 
C)  21.25 percent, 8.33 percent, 11.43 percent 
D)  6.20 percent, 2.20 percent, 8.20 percent 
E)  15.00 percent, 3.50 percent, 7.30 percent 
A)  16.50 percent, 5.50 percent, 22.00 percent 
B)  9.25 percent, 10.5 percent, 7.5 percent 
C)  21.25 percent, 8.33 percent, 11.43 percent 
D)  6.20 percent, 2.20 percent, 8.20 percent 
E)  15.00 percent, 3.50 percent, 7.30 percent

Question 3

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. Suppose that you know that the prices of stocks A, B, and C will be $10.95, 22.18, and $30.89, respectively. Based on this information,

Accepted Answer

A)  all three stocks are overvalued. 
B)  all three stocks are undervalued. 
C)  stock a is undervalued, stock b is properly valued, and stock c is undervalued. 
D)  stock a is undervalued, stock b is properly valued, and stock c is overvalued. 
E)  stock a is overvalued, stock b is overvalued, and stock c is undervalued. 
A)  all three stocks are overvalued. 
B)  all three stocks are undervalued. 
C)  stock a is undervalued, stock b is properly valued, and stock c is undervalued. 
D)  stock a is undervalued, stock b is properly valued, and stock c is overvalued. 
E)  stock a is overvalued, stock b is overvalued, and stock c is undervalued.

Question 4

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
  
-Refer to Exhibit 7.7. What are the estimated rates of return for the three stocks (in the order A, B, C)?

Accepted Answer

A)  13.0 percent, 10.6 percent, 8.8 percent 
B)  15.0 percent, 11.1 percent, 2.9 percent 
C)  18.7 percent, 11.1 percent, 8.8 percent 
D)  21.7 percent, 10.0 percent, 6.9 percent 
E)  25.0 percent, 11.1 percent, 7.1 percent 
A)  13.0 percent, 10.6 percent, 8.8 percent 
B)  15.0 percent, 11.1 percent, 2.9 percent 
C)  18.7 percent, 11.1 percent, 8.8 percent 
D)  21.7 percent, 10.0 percent, 6.9 percent 
E)  25.0 percent, 11.1 percent, 7.1 percent

Question 5

The equation for the single-index market model is

Accepted Answer

A)  RFRit = ai + bRmt + et. 
B)  Rit = ai + bRmt + et. 
C)  Rit = ai + bRFRt + et. 
D)  Rmt = ai + bRit + et. 
E)  Rit = ai + b(Rmt - RFRt) + et. 
A)  RFRit = ai + bRmt + et. 
B)  Rit = ai + bRmt + et. 
C)  Rit = ai + bRFRt + et. 
D)  Rmt = ai + bRit + et. 
E)  Rit = ai + b(Rmt - RFRt) + et.

Question 6

Assume the risk-free rate is 4.5 percent and the expected return on the market is 11 percent. You anticipate Stock XYZ to sell for $28 at the end of next year and pay a dividend of $2. The stock is currently selling for $26.50 with a beta of 1.2. You currently hold stock XYZ in a well-diversified portfolio. Assuming you have money to invest, you should

Accepted Answer

A)  buy stock XYZ. 
B)  sell stock XYZ. 
C)  do nothing because it is properly valued. 
D)  invest your money in the risk-free rate of return. 
E)  buy a put option. 
A)  buy stock XYZ. 
B)  sell stock XYZ. 
C)  do nothing because it is properly valued. 
D)  invest your money in the risk-free rate of return. 
E)  buy a put option.

Question 7

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.8. In the list above, which are NOT assumptions of the Arbitrage Pricing model?

Accepted Answer

A)  (1) and (3) 
B)  (1), (2), and (3) 
C)  (1), (2), and (5) 
D)  (2), (4), and (6) 
E)  (1), (2), (3), (4), (5), and (6) 
A)  (1) and (3) 
B)  (1), (2), and (3) 
C)  (1), (2), and (5) 
D)  (2), (4), and (6) 
E)  (1), (2), (3), (4), (5), and (6)

Question 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.3. What is the beta for Radtron using the true index?

Accepted Answer

A)  0.87 
B)  0.97 
C)  1.02 
D)  1.15 
E)  1.28 
A)  0.87 
B)  0.97 
C)  1.02 
D)  1.15 
E)  1.28

Question 9

The table below provides factor risk sensitivities and factor risk premia for a three-factor model for a particular asset, where factor 1 is MP (the growth rate in U.S. industrial production), factor 2 is UI (the difference between actual and expected inflation), and factor 3 is UPR (the unanticipated change in bond credit spread).   Calculate the expected excess return for the asset.

Accepted Answer

A)  12.32 percent 
B)  9.32 percent 
C)  4.56 percent 
D)  6.32 percent 
E)  8.02 percent 
A)  12.32 percent 
B)  9.32 percent 
C)  4.56 percent 
D)  6.32 percent 
E)  8.02 percent

Question 10

A 1994 study by Burmeister, Roll, and Ross defined all of the following risk factors EXCEPT

Accepted Answer

A)  confidence risk 
B)  market risk. 
C)  inflation risk. 
D)  market-timing risk. 
E)  business cycle risk. 
A)  confidence risk 
B)  market risk. 
C)  inflation risk. 
D)  market-timing risk. 
E)  business cycle risk.

Question 11

Consider the following list of risk factors:   Which of the following factors would you use to develop a macroeconomic-based risk factor model?

Accepted Answer

A)  (1), (2), and (3) 
B)  (1), (3), and (5) 
C)  (2), (4), and (5) 
D)  (1), (3), and (6) 
E)  (4), (5), and (6) 
A)  (1), (2), and (3) 
B)  (1), (3), and (5) 
C)  (2), (4), and (5) 
D)  (1), (3), and (6) 
E)  (4), (5), and (6)

Question 12

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. The expected prices one year from now for stocks X, Y, and Z are

Accepted Answer

A)  $53.55, $54.4, $55.25 
B)  $45.35, $54.4, $55.25 
C)  $55.55, $56.35, $57.15 
D)  $50, $50, $50 
E)  $51.35, $47.79, $51.58. 
A)  $53.55, $54.4, $55.25 
B)  $45.35, $54.4, $55.25 
C)  $55.55, $56.35, $57.15 
D)  $50, $50, $50 
E)  $51.35, $47.79, $51.58.

Question 13

Studies strongly suggest that the CAPM be abandoned and replaced with the APT.

Accepted Answer

A) True 
 B)False

Question 14

Calculate the expected return for A Industries, which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.

Accepted Answer

A)  11.13 percent 
B)  14.97 percent 
C)  16.25 percent 
D)  22.25 percent 
E)  17.0 percent 
A)  11.13 percent 
B)  14.97 percent 
C)  16.25 percent 
D)  22.25 percent 
E)  17.0 percent

Question 15

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 7.1. If you expected the return on the Market Index to be 12%, what would you expect the return on RA Computer to be?

Accepted Answer

A)  7.26% 
B)  6.75% 
C)  8.00% 
D)  9.37% 
E)  -3.29% 
A)  7.26% 
B)  6.75% 
C)  8.00% 
D)  9.37% 
E)  -3.29%

Question 16

Consider a two-factor APT model in which the first factor is changes in the 30-year T-bond rate, and the second factor is the percent growth in GNP. Based on historical estimates, you determine that the risk premium for the interest rate factor is 0.02, and the risk premium on the GNP factor is 0.03. For a particular asset, the response coefficient for the interest rate factor is -1.2, and the response coefficient for the GNP factor is 0.80. The rate of return on the zero-beta asset is 0.03. Calculate the expected return for the asset.

Accepted Answer

A)  5.0 percent 
B)  2.4 percent 
C)  -3.0 percent 
D)  -2.4 percent 
E)  3.0 percent 
A)  5.0 percent 
B)  2.4 percent 
C)  -3.0 percent 
D)  -2.4 percent 
E)  3.0 percent

Question 17

In a multifactor model, time horizon risk represents

Accepted Answer

A)  unanticipated changes in the level of overall business activity. 
B)  unanticipated changes in investors' desired time to receive payouts. 
C)  unanticipated changes in short-term and long-term inflation rates. 
D)  unanticipated changes in the willingness of investors to take on investment risk. 
E)  None of these are correct. 
A)  unanticipated changes in the level of overall business activity. 
B)  unanticipated changes in investors' desired time to receive payouts. 
C)  unanticipated changes in short-term and long-term inflation rates. 
D)  unanticipated changes in the willingness of investors to take on investment risk. 
E)  None of these are correct.

Question 18

An investor wishes to construct a portfolio by borrowing 30 percent of his initial wealth at the risk-free rate of 3 percent and investing all the money in a stock index. The expected return on the stock index is 12 percent. Calculate the expected return on the portfolio.

Accepted Answer

A)  14.7 percent 
B)  15.6 percent 
C)  17.1 percent 
D)  18.9 percent 
E)  19.7 percent 
A)  14.7 percent 
B)  15.6 percent 
C)  17.1 percent 
D)  18.9 percent 
E)  19.7 percent

Question 19

Under the following conditions, what are the expected returns for stocks A and C?

Accepted Answer

A)  14.1 percent and 17.65 percent 
B)  14.1 percent and 18.45 percent 
C)  17.65 percent and 18.45 percent 
D)  18.45 percent and 17.52 percent 
E)  19.55 percent and 17.25 percent 
A)  14.1 percent and 17.65 percent 
B)  14.1 percent and 18.45 percent 
C)  17.65 percent and 18.45 percent 
D)  18.45 percent and 17.52 percent 
E)  19.55 percent and 17.25 percent

Question 20

Multifactor models of risk and return can be broadly grouped into models that use macroeconomic factors and models that use microeconomic factors.

Accepted Answer

A) True 
 B)False

Cho, Elton, and Gruber tested the APT by examining the number of factors in the return generating process and found that

The equation for the single-index market model is

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.8. In the list above, which are NOT assumptions of the Arbitrage Pricing model?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. What is the beta for Radtron using the true index?

A 1994 study by Burmeister, Roll, and Ross defined all of the following risk factors EXCEPT

Consider the following list of risk factors: Which of the following factors would you use to develop a macroeconomic-based risk factor model?

Studies strongly suggest that the CAPM be abandoned and replaced with the APT.

Calculate the expected return for A Industries, which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.1. If you expected the return on the Market Index to be 12%, what would you expect the return on RA Computer to be?

In a multifactor model, time horizon risk represents

An investor wishes to construct a portfolio by borrowing 30 percent of his initial wealth at the risk-free rate of 3 percent and investing all the money in a stock index. The expected return on the stock index is 12 percent. Calculate the expected return on the portfolio.

Under the following conditions, what are the expected returns for stocks A and C?

Multifactor models of risk and return can be broadly grouped into models that use macroeconomic factors and models that use microeconomic factors.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 7: Asset Pricing Models

Cho, Elton, and Gruber tested the APT by examining the number of factors in the return generating process and found that

The equation for the single-index market model is

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.8. In the list above, which are NOT assumptions of the Arbitrage Pricing model?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.3. What is the beta for Radtron using the true index?

A 1994 study by Burmeister, Roll, and Ross defined all of the following risk factors EXCEPT

Consider the following list of risk factors: Which of the following factors would you use to develop a macroeconomic-based risk factor model?

Studies strongly suggest that the CAPM be abandoned and replaced with the APT.

Calculate the expected return for A Industries, which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 7.1. If you expected the return on the Market Index to be 12%, what would you expect the return on RA Computer to be?

In a multifactor model, time horizon risk represents

An investor wishes to construct a portfolio by borrowing 30 percent of his initial wealth at the risk-free rate of 3 percent and investing all the money in a stock index. The expected return on the stock index is 12 percent. Calculate the expected return on the portfolio.

Under the following conditions, what are the expected returns for stocks A and C?

Multifactor models of risk and return can be broadly grouped into models that use macroeconomic factors and models that use microeconomic factors.

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters