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Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

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Question 31

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Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size

A) I only
B) I and II only
C) I and III only
D) I, II, and III

E) A) and B)
F) A) and D)

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Question 32

Multiple Choice

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Building a zero-investment portfolio will always involve ________.

A) an unknown mixture of short and long positions
B) only short positions
C) only long positions
D) equal investments in a short and a long position

E) B) and C)
F) A) and C)

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Question 33

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In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line?

According to capital asset pricing theory, the key determinant of portfolio returns is ________.

Investors require a risk premium as compensation for bearing ________.

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

If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index?

According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%?

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

The market portfolio has a beta of ________.

According to the CAPM, which of the following is not a true statement regarding the market portfolio.

There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model?

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

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, ________.

Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ________ over time.

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is ________.

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.

What is the expected return for a portfolio with a beta of .5?

In a single-factor market model the beta of a stock ________.

In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: I. Including the unsystematic risk of a stock II. Including human capital in the market portfolio III. Allowing for changes in beta over time