Question 1

The Fama-French three factor model includes the following factors:

Accepted Answer

A)  beta, expected return on the market, risk free rate of interest, a size factor, and a value factor. 
B)  the market risk premium, a volume factor, and a size factor. 
C)  beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor. 
D)  the yield on corporate bonds, a size factor, and a market factor. 
E)  None of these.

Question 2

The systematic response coefficient for productivity,βp,would produce an unexpected change in any security return of __ βP if the expected rate of productivity was 1.8% and the actual rate was 2.3%.

Accepted Answer

A)  0.5% 
B)  -0.5% 
C)  2.3% 
D)  -2.3% 
E)  1.8%

Question 3

Systematic risk is defined as:

Accepted Answer

A)  a risk that specifically affects an asset or small group of assets. 
B)  any risk that affects a large number of assets. 
C)  any risk that has a huge impact on the return of a security. 
D)  the random component of return. 
E)  None of these.

Question 4

Explain the conceptual differences in the theoretical development of the CAPM and APT.

Accepted Answer

The answer of Explain the conceptual differences in the theoretical...

Question 5

What would not be true about a GNP beta?

Accepted Answer

A)  If a stock's β GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP. 
B)  If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP. 
C)  It is a measure of risk. 
D)  It measures the impact of systematic risk associated with GNP. 
E)  None of these.

Question 6

Suppose the Binder Corporation's common stock has a return of 17%. Assume the risk-free rate is 5%,the expected market return is 8%,and no unsystematic influence affected Binder's return. The beta for Binder is:

Accepted Answer

A)  0. 
B)  2. 
C)  3. 
D)  4. 
E)  It is impossible to calculate beta without the inflation ratE. 17 = 5 + β(8 - 5); β = 4

Question 7

The betas along with the factors in the APT adjust the expected return for:

Accepted Answer

A)  calculation errors. 
B)  unsystematic risks. 
C)  spurious correlations of factors. 
D)  differences between actual and expected levels of factors. 
E)  All of

Question 8

In the one factor (APT) model,the characteristic line to estimate βi passes through the origin,unlike the estimate used in the CAPM because:

Accepted Answer

A)  the relationship is between the actual return on a security and the market index. 
B)  the relationship measures the change in the security return over time versus the change in the market return. 
C)  the relationship measures the change in excess return on a security versus GNP. 
D)  the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero. 
E)  Cannot be determined without actual data.

Question 9

The most realistic APT model would likely include:

Accepted Answer

A)  multiple factors. 
B)  only one factor. 
C)  a factor to measure inflation. 
D)  Both multiple factors; and a factor to measure inflation. 
E)  Both only one factor; and a factor to measure inflation.

Question 10

Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%,the expected return for JumpStart's common stock is:

Accepted Answer

A)  3.2%. 
B)  4.0%. 
C)  7.2%. 
D)  8.0%. 
E)  9.0%.

Question 11

The term Corr (ε R,ε T) = 0 tells us that:

Accepted Answer

A)  all error terms of company R and T are 0. 
B)  the unsystematic risk of companies R and T is unrelated or uncorrelated. 
C)  the correlation between the returns of companies R and T is -1. 
D)  the systematic risk of companies R and T is unrelated. 
E)  None of these.

Exam 12: An Alternative View of Risk and Return: The Arbitrage Pricing Theory