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Exam 7: Capital Pricing and Arbitrage Pricing Theory

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Question 21

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According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a share beta of 1.2, and a risk-free interest rate of 5.0%?

A) 5.0%
B) 9.0%
C) 13.0%
D) 14.0%

E) A) and B)
F) None of the above

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Question 22

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Research has identified two systematic factors that affect US stock (share) returns. The factors are growth in industrial production and changes in long term interest rates. Industrial production growth is expected to be 3% and long term interest rates are expected to increase by 1%. You are analysing a share that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2% what is your best guess of the share's return?

A) 15.9%
B) 12.9%
C) 13.2%
D) 12.0%

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

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Question 23

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Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of 0.7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio ________ and a long position in portfolio ________.

Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a share with a beta of 1.3?

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

You run a regression of a share's returns versus a market index and find the following: Based on the data you know that the share

Investors require a risk premium as compensation for bearing ________.

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is ________.

Arbitrage is ________.

The risk premium for exposure to exchange rates is 5% and the firm has a beta relative to exchanges rates of 0.4. The risk premium for exposure to the consumer price index is -6% and the firm has a beta relative to the CPI of 0.8. If the risk-free rate is 3.0%, what is the expected return on this share?

Standard deviation of portfolio returns is a measure of ________.

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

In the context of the capital asset pricing model, the systematic measure of risk is captured by ________.

Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately ________.

You have a $50 000 portfolio consisting of Intel, GE and Con Edison. You put $20 000 in Intel, $12 000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta?

An important characteristic of market equilibrium is ________.

According to the CAPM, the risk premium an investor expects to receive on any share or portfolio is ________.

In a single factor market model the beta of a share ________.

According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a share beta of 1.2, and a risk-free interest rate of 4.0%?

A share's alpha measures the share's ________.