In the equation R = R+ U, the three symbols stand for:
actual total return, expected return, and unexpected return
The acronym APT stands for:
Arbitrage Pricing Theory
The acronym CAPM stands for:
Capital Asset Pricing Model
The unexpected return on a security, U, is made up of:
systematic risk and unsystematic risk
Systematic risk is defined as:
any risk that affects a large number of assets
The term Corr (? R, ? T) = 0 tells us that:
the unsystematic risk of companies R and T is unrelated or uncorrelated
A factor is a variable that:
affects the returns of risky assets in a systematic fashion
A security that has a beta of zero will have an expected return of:
the risk free rate
Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?
The price will change little, if at all, since the market has already included this information in the security's price
Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:
the unexpected part of the announcement
A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.
positive, unanticipated
If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:
no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element
What would not be true about a GNP beta?
A. If a stock's ? GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.
B. If a stock's ? 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
If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, ?I, would result in a change in any security return of ___ ?I.
3.2
In a portfolio of risky assets, the response to a factor, Fi, can be determined by:
summing the weighted ?i s and multiplying by the factor Fi
In the one factor (APT) model, the characteristic line to estimate ?i passes through the origin, unlike the estimate used in the CAPM because:
the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero
The betas along with the factors in the APT adjust the expected return for:
differences between actual and expected levels of factors
The single factor APT model that resembles the market model uses _________ as the single factor.
the market return
For a diversified portfolio including a large number of stocks, the:
weighted average of the unsystematic risk goes to zero
Which of the following statements is true?
A well-diversified portfolio has negligible unsystematic risk
Assuming that the single factor APT model applies, the beta for the market portfolio is:
one
In normal market conditions if a security has a negative beta:
the security has an expected return less than the risk-free rate
A criticism of the CAPM is that it:
requires a single measure of systematic risk
To estimate the cost of equity capital for a firm using the CAPM, it is necessary to have:
beta, the risk-free rate, and the market risk premium
Parametric or empirical models rely on:
finding regularities and relations in past market data
A growth stock portfolio and a value portfolio might be characterized:
each by their P/E relative to the index P/E; high P/E for growth and lower for value
Style portfolios are characterized by:
their stock attributes; P/Es less than the market P/E are value funds
The most realistic APT model would likely include:
Both multiple factors; and a factor to measure inflation
Which of the following statements is/are true?
Both APT and CAPM argue that expected excess return must be proportional to the beta(s); and Both CAPM and APT are risk-based models
Three factors likely to occur in the APT model are:
inflation, GNP, and interest rates
Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk
via the industry wide or marketwide factors creating correlation between securities
The Fama-French three factor model includes the following factors:
beta, expected return on the market, risk free rate of interest, a size factor, and a value factor
A value company is defined as one that:
tends to have higher average return than a growth company
&
has a high ratio of book equity to market equity
The Fama-French three factor model predicts the expected return on a portfolio increases:
linearly with its factor loading of the size factor