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Exam 12: Arbitrage Pricing Theory

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Question 21

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A similarity between APT and CAPM is that both

A) assume security sensitivities are explained by beta.
B) assumes investors want the largest return for a given level of risk.
C) make the same assumption about riskfree lending rates.
D) use the covariance between a security and the market.

E) None of the above
F) All of the above

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Question 22

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In a two-factor model, each security will have _____ sensitivity coefficients.

A) two
B) one
C) none
D) many

E) All of the above
F) A) and B)

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Question 23

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To solve an arbitrage portfolio with five securities and five factors, an analyst would have the following number of formulas

An analyst develops her APT asset pricing line and finds that Securities A and B both have the same factor sensitivity. A lies above the line; B lies below the line. She should

Provided a proxy for the market portfolio could be found, then the CAPM and the APT would ________.

The APT approach assumes stock returns are related to the factors of

An investor seeks to explore the possibility of forming an arbitrage portfolio in order to increase

The assumptions found in the APT appear __________ the assumptions of the CAPM.

In a single-factor APT model, the variance of returns on the factor portfolio is 9%, and the beta of a well-diversified portfolio on the factor is 1.2. What is the variance of return on the well-diversified portfolio?

Consider a one-factor APT model where the standard deviation of the return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified portfolio is approximately

In a multiple-factor situation, the asset pricing line

Suppose in a single factor APT model, portfolio A has a beta of 1.3 and expected returns of 21%. Portfolio B has a beta of 0.7 and returns of 17%. The risk free rate 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 _____.

_______ risk is the portion of a security's total risk that is not related to moves in various common factors.

Which one of the following is NOT a condition which defines an arbitrage portfolio?

Which one of the following is not a significant difference between the APT and the CAPM model?

Suppose in a single factor APT model, portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate is 10%. If an investor wanted to take advantage of an arbitrage opportunity, he or she would take a short position in portfolio _____ and a long position in portfolio _____.

____ is the process of earning risk less profits by taking advantage of differential pricing for the same physical asset or security.

APT assumes that an arbitrage portfolio's nonfactor risk is

Which one of the following is NOT an accurate statement about why an investor would want to form an arbitrage portfolio? APT portfolios

Some common characteristics of the relevant factors of APT models include all of the following EXCEPT