Investments Global Edition 10Th Edition Bodie Test Bank Full Chapter PDF
Investments Global Edition 10Th Edition Bodie Test Bank Full Chapter PDF
Investments Global Edition 10Th Edition Bodie Test Bank Full Chapter PDF
A. APT stipulates
B. CAPM stipulates
2. Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a
beta of 1.45 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1
portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no
arbitrage opportunities exist?
A. 9.26%
B. 3%
C. 4%
D. 7.75%
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3. In a multifactor APT model, the coefficients on the macro factors are often called
A. systemic risk.
B. factor sensitivities.
C. idiosyncratic risk.
D. factor betas.
4. In a multifactor APT model, the coefficients on the macro factors are often called
A. systemic risk.
B. firm-specific risk.
C. idiosyncratic risk.
D. factor betas.
5. In a multifactor APT model, the coefficients on the macro factors are often called
A. systemic risk.
B. firm-specific risk.
C. idiosyncratic risk.
D. factor loadings.
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6. Which pricing model provides no guidance concerning the determination of the risk premium
on factor portfolios?
A. The CAPM
A. positive
B. negative
C. zero
A. Lintner.
C. Ross.
D. Sharpe.
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9. A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of
the factors and a beta of 0 on any other factor.
A. factor
B. market
C. index
10. The exploitation of security mispricing in such a way that risk-free economic profits may be
earned is called
A. arbitrage.
C. factoring.
D. fundamental analysis.
11. In developing the APT, Ross assumed that uncertainty in asset returns was a result of
B. firm-specific factors.
C. pricing error.
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12. The ____________ provides an unequivocal statement on the expected return-beta
relationship for all assets, whereas the _____________ implies that this relationship holds for
all but perhaps a small number of securities.
A. APT, CAPM
B. APT, OPM
C. CAPM, APT
D. CAPM, OPM
13. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%.
Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%.
If you wanted to take advantage of an arbitrage opportunity, you should take a short position
in portfolio __________ and a long position in portfolio _______.
A. A, A
B. A, B
C. B, A
D. B, B
14. Consider the single factor APT. 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 of return is
10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short
position in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
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15. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta
of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-
diversified portfolio is approximately
A. 3.6%.
B. 6.0%.
C. 7.3%.
D. 10.1%.
16. Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio
is 18%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified
portfolio is approximately
A. 0.80.
B. 1.13.
C. 1.25.
D. 1.56.
17. Consider the single-factor APT. Stocks A and B have expected returns of 15% and 18%,
respectively. The risk-free rate of return is 6%. Stock B has a beta of 1.0. If arbitrage
opportunities are ruled out, stock A has a beta of
A. 0.67.
B. 1.00.
C. 1.30.
D. 1.69.
E. 0.75.
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18. Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a
beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on the factor 1 portfolio
is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage
opportunities exist?
A. 2%
B. 3%
C. 4%
D. 7.75%
19. Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on factor
1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and factor 2 portfolios are
1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A
is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 15.0%
C. 16.5%
D. 23.0%
20. Consider the multifactor APT with two factors. The risk premiums on the factor 1 and factor 2
portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor 1, and a beta of 0.7
on factor 2. The expected return on stock A is 17%. If no arbitrage opportunities exist, the
risk-free rate of return is
A. 6.0%.
B. 6.5%.
C. 6.8%.
D. 7.4%.
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21. Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor and portfolio B has
a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11% and 17%,
respectively. Assume that the risk-free rate is 6% and that arbitrage opportunities exist.
Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short
$200,000 of portfolio A. Your expected profit from this strategy would be
A. -$1,000.
B. $0.
C. $1,000.
D. $2,000.
22. Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The
betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on portfolios A
and B are 19% and 24%, respectively. Assuming no arbitrage opportunities exist, the risk-free
rate of return must be
A. 4.0%.
B. 9.0%.
C. 14.0%.
D. 16.5%.
23. Consider the multifactor APT. The risk premiums on the factor 1 and factor 2 portfolios are
5% and 3%, respectively. The risk-free rate of return is 10%. Stock A has an expected return
of 19% and a beta on factor 1 of 0.8. Stock A has a beta on factor 2 of
A. 1.33.
B. 1.50.
C. 1.67.
D. 2.00.
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24. Consider the single factor APT. Portfolios A and B have expected returns of 14% and 18%,
respectively. The risk-free rate of return is 7%. Portfolio A has a beta of 0.7. If arbitrage
opportunities are ruled out, portfolio B must have a beta of
A. 0.45.
B. 1.00.
C. 1.10.
D. 1.22.
25. There are three stocks, A, B, and C. You can either invest in these stocks or short sell them.
There are three possible states of nature for economic growth in the upcoming year (each
equally likely to occur); economic growth may be strong, moderate, or weak. The returns for
the upcoming year on stocks A, B, and C for each of these states of nature are given below:
If you invested in an equally weighted portfolio of stocks A and B, your portfolio return would
be ___________ if economic growth were moderate.
A. 3.0%
B. 14.5%
C. 15.5%
D. 16.0%
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26. There are three stocks, A, B, and C. You can either invest in these stocks or short sell them.
There are three possible states of nature for economic growth in the upcoming year (each
equally likely to occur); economic growth may be strong, moderate, or weak. The returns for
the upcoming year on stocks A, B, and C for each of these states of nature are given below:
If you invested in an equally weighted portfolio of stocks A and C, your portfolio return would
be ____________ if economic growth was strong.
A. 17.0%
B. 22.5%
C. 30.0%
D. 30.5%
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27. There are three stocks, A, B, and C. You can either invest in these stocks or short sell them.
There are three possible states of nature for economic growth in the upcoming year (each
equally likely to occur); economic growth may be strong, moderate, or weak. The returns for
the upcoming year on stocks A, B, and C for each of these states of nature are given below:
If you invested in an equally weighted portfolio of stocks B and C, your portfolio return would
be _____________ if economic growth was weak.
A. -2.5%
B. 0.5%
C. 3.0%
D. 11.0%
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28. There are three stocks, A, B, and C. You can either invest in these stocks or short sell them.
There are three possible states of nature for economic growth in the upcoming year (each
equally likely to occur); economic growth may be strong, moderate, or weak. The returns for
the upcoming year on stocks A, B, and C for each of these states of nature are given below:
If you wanted to take advantage of a risk-free arbitrage opportunity, you should take a short
position in _________ and a long position in an equally weighted portfolio of _______.
A. A, B and C
B. B, A and C
C. C, A and B
D. A and B, C
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29. Consider the multifactor APT. There are two independent economic factors, F1 and F2. The
risk-free rate of return is 6%. The following information is available about two well-diversified
portfolios:
Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio should
be
A. 3%.
B. 4%.
C. 5%.
D. 6%.
30. Consider the multifactor APT. There are two independent economic factors, F1 and F2. The
risk-free rate of return is 6%. The following information is available about two well-diversified
portfolios:
Assuming no arbitrage opportunities exist, the risk premium on the factor F2 portfolio should
be
A. 3%.
B. 4%.
C. 5%.
D. 6%.
10-13
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31. A zero-investment portfolio with a positive expected return arises when
32. An investor will take as large a position as possible when an equilibrium price relationship is
violated. This is an example of
A. a dominance argument.
C. a risk-free arbitrage.
33. The APT differs from the CAPM because the APT
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34. The feature of the APT that offers the greatest potential advantage over the CAPM is the
A. use of several factors instead of a single market index to explain the risk-return
relationship.
C. superior measurement of the risk-free rate of return over historical time periods.
D. variability of coefficients of sensitivity to the APT factors for a given asset over time.
D. only factor risk commands a risk premium in market equilibrium and only systematic risk is
related to expected returns.
E. only factor risk commands a risk premium in market equilibrium and only nonsystematic
risk is related to expected returns.
C. inflation rates.
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37. Advantage(s) of the APT is(are)
A. that the model provides specific guidance concerning the determination of the risk
premiums on the factor portfolios.
B. that the model does not require a specific benchmark market portfolio.
D. that the model provides specific guidance concerning the determination of the risk
premiums on the factor portfolios and that the model does not require a specific
benchmark market portfolio.
E. that the model does not require a specific benchmark market portfolio and that risk need
not be considered.
38. Portfolio A has expected return of 10% and standard deviation of 19%. Portfolio B has
expected return of 12% and standard deviation of 17%. Rational investors will
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39. An important difference between CAPM and APT is
B. CAPM assumes many small changes are required to bring the market back to equilibrium;
APT assumes a few large changes are required to bring the market back to equilibrium.
C. implications for prices derived from CAPM arguments are stronger than prices derived
from APT arguments.
40. A professional who searches for mispriced securities in specific areas such as merger-target
stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in
A. pure arbitrage.
B. risk arbitrage.
C. option arbitrage.
D. equilibrium arbitrage.
41. In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger
its nonsystematic risk approaches
A. one.
B. infinity.
C. zero.
D. negative one.
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42. A well-diversified portfolio is defined as
A. one that is diversified over a large enough number of securities that the nonsystematic
variance is essentially zero.
B. one that contains securities from at least three different industry sectors.
E. that is unobservable.
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44. Imposing the no-arbitrage condition on a single-factor security market implies which of the
following statements?
I) The expected return-beta relationship is maintained for all but a small number of well-
diversified portfolios.
II) The expected return-beta relationship is maintained for all well-diversified portfolios.
III) The expected return-beta relationship is maintained for all but a small number of
individual securities.
IV) The expected return-beta relationship is maintained for all individual securities.
A. I and III
B. I and IV
C. II and III
D. II and IV
E. Only I is correct.
45. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the
risk premium on the first factor portfolio is 4% and the risk premium on the second factor
portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor,
what is its expected return?
A. 7.0%
B. 8.0%
C. 9.2%
D. 13.0%
E. 13.2%
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46. The term "arbitrage" refers to
A. I and IV
B. I and III
C. II and III
D. I, III, and IV
A. firm-specific risk.
D. the deviation from its expected value of a factor that affects all security returns.
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49. In the APT model, what is the nonsystematic standard deviation of an equally weighted
portfolio that has an average value of σ(ei) equal to 25% and 50 securities?
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 14.59%
50. In the APT model, what is the nonsystematic standard deviation of an equally weighted
portfolio that has an average value of σ(ei) equal to 20% and 20 securities?
A. 12.5%
B. 625%
C. 4.47%
D. 3.54%
E. 14.59%
51. In the APT model, what is the nonsystematic standard deviation of an equally weighted
portfolio that has an average value of σ(ei) equal to 20% and 40 securities?
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 3.16%
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52. In the APT model, what is the nonsystematic standard deviation of an equally weighted
portfolio that has an average value of σ(ei) equal to 18% and 250 securities?
A. 1.14%
B. 625%
C. 0.5%
D. 3.54%
E. 3.16%
53. Which of the following is true about the security market line (SML) derived from the APT?
B. The SML for the APT shows expected return in relation to portfolio standard deviation.
C. The SML for the APT has an intercept equal to the expected return on the market
portfolio.
D. The benchmark portfolio for the SML may be any well-diversified portfolio.
54. Which of the following is false about the security market line (SML) derived from the APT?
B. The SML for the APT shows expected return in relation to portfolio standard deviation.
C. The SML for the APT has an intercept equal to the expected return on the market
portfolio.
D. The benchmark portfolio for the SML may be any well-diversified portfolio.
E. The SML has a downward slope, shows expected return in relation to portfolio standard
deviation, and has an intercept equal to the expected return on the market portfolio.
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55. If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected
excess return must be
56. Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2. The portfolios
have expected returns of 15% and 6%, respectively. Based on this information, what would be
the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor
and 0.50 on the second factor? The risk-free rate is 3%.
A. 15.2%
B. 14.1%
C. 13.3%
D. 10.7%
E. 8.4%
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57. Which of the following is(are) true regarding the APT?
B. II and IV
C. II and III
D. I, II, and IV
58. In a factor model, the return on a stock in a particular period will be related to
A. factor risk.
B. nonfactor risk.
59. Which of the following factors did Chen, Roll, and Ross not include in their multifactor
model?
E. All of the factors are included in the Chen, Roll, and Ross multifactor model.
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60. Which of the following factors did Chen, Roll, and Ross include in their multifactor model?
61. Which of the following factors were used by Fama and French in their multifactor model?
62. Consider the single-factor APT. Stocks A and B have expected returns of 12% and 14%,
respectively. The risk-free rate of return is 5%. Stock B has a beta of 1.2. If arbitrage
opportunities are ruled out, stock A has a beta of
A. 0.67.
B. 0.93.
C. 1.30.
D. 1.69.
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63. Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio
is 19%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified
portfolio is approximately
A. 1.58.
B. 1.13.
C. 1.25.
D. 0.76.
64. Black argues that past risk premiums on firm-characteristic variables, such as those
described by Fama and French, are problematic because
65. Multifactor models seek to improve the performance of the single-index model by
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66. Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe
assets' returns by
67. Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on factor
1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the factor 1,
factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of return is 3%. The
expected return on portfolio A is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 13.4%
C. 16.5%
D. 23.0%
68. Consider the multifactor APT. The risk premiums on the factor 1 and factor 2 portfolios are
6% and 4%, respectively. The risk-free rate of return is 4%. Stock A has an expected return of
16% and a beta on factor 1 of 1.3. Stock A has a beta on factor 2 of
A. 1.33.
B. 1.05.
C. 1.67.
D. 2.00.
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69. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 5%, the
risk premium on the first factor portfolio is 4% and the risk premium on the second factor
portfolio is 6%. If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor,
what is its expected return?
A. 7.0%
B. 8.0%
C. 18.2%
D. 13.0%
E. 13.2%
70. Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 22%.
Portfolio B has a beta of 1.5 and an expected return of 17%. The risk-free rate of return is 4%.
If you wanted to take advantage of an arbitrage opportunity, you should take a short position
in portfolio __________ and a long position in portfolio _______.
A. A, A
B. A, B
C. B, A
D. B, B
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71. Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%.
Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of return is 5%.
If you wanted to take advantage of an arbitrage opportunity, you should take a short position
in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
72. Consider the one-factor APT. The variance of returns on the factor portfolio is 9%. The beta
of a well-diversified portfolio on the factor is 1.25. The variance of returns on the well-
diversified portfolio is approximately
A. 3.6%.
B. 6.0%.
C. 7.3%.
D. 14.1%.
73. Consider the one-factor APT. The variance of returns on the factor portfolio is 11%. The beta
of a well-diversified portfolio on the factor is 1.45. The variance of returns on the well-
diversified portfolio is approximately
A. 23.1%.
B. 6.0%.
C. 7.3%.
D. 14.1%.
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74. Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio
is 22%. The standard deviation on the factor portfolio is 14%. The beta of the well-diversified
portfolio is approximately
A. 0.80.
B. 1.13.
C. 1.25.
D. 1.57.
75. Discuss the advantages of arbitrage pricing theory (APT) over the capital asset pricing model
(CAPM) relative to diversified portfolios.
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76. Discuss the advantages of the multifactor APT over the single factor APT and the CAPM.
What is one shortcoming of the multifactor APT and how does this shortcoming compare to
CAPM implications?
77. Discuss arbitrage opportunities in the context of violations of the law of one price.
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78. Discuss the similarities and the differences between the CAPM and the APT with regard to
the following factors: capital market equilibrium, assumptions about risk aversion, risk-return
dominance, and the number of investors required to restore equilibrium.
79. Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and
an expected return of 11%. The risk-free rate is 6%. Explain the arbitrage opportunity that
exists; explain how an investor can take advantage of it. Give specific details about how to
form the portfolio, what to buy and what to sell.
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80. Name three variables that Chen, Roll, and Ross used to measure the impact of
macroeconomic factors on security returns. Briefly explain the reasoning behind their model.
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Chapter 10 Arbitrage Pricing Theory and Multifactor Models of Risk
and Return Answer Key
A. APT stipulates
B. CAPM stipulates
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT and CAPM
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2. Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a
beta of 1.45 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1
portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if
no arbitrage opportunities exist?
A. 9.26%
B. 3%
C. 4%
D. 7.75%
AACSB: Analytic
Blooms: Apply
Difficulty: Challenge
Topic: APT
3. In a multifactor APT model, the coefficients on the macro factors are often called
A. systemic risk.
B. factor sensitivities.
C. idiosyncratic risk.
D. factor betas.
The coefficients are called factor betas, factor sensitivities, or factor loadings.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
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4. In a multifactor APT model, the coefficients on the macro factors are often called
A. systemic risk.
B. firm-specific risk.
C. idiosyncratic risk.
D. factor betas.
The coefficients are called factor betas, factor sensitivities, or factor loadings.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
5. In a multifactor APT model, the coefficients on the macro factors are often called
A. systemic risk.
B. firm-specific risk.
C. idiosyncratic risk.
D. factor loadings.
The coefficients are called factor betas, factor sensitivities, or factor loadings.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
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6. Which pricing model provides no guidance concerning the determination of the risk
premium on factor portfolios?
A. The CAPM
The multifactor APT provides no guidance as to the determination of the risk premium on
the various factors. The CAPM assumes that the excess market return over the risk-free
rate is the market premium in the single factor CAPM.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: APT and CAPM
A. positive
B. negative
C. zero
If the investor can construct a portfolio without the use of the investor's own funds and
the portfolio yields a positive profit, arbitrage opportunities exist.
AACSB: Analytic
Blooms: Remember
10-37
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McGraw-Hill Education.
Difficulty: Basic
Topic: APT
A. Lintner.
C. Ross.
D. Sharpe.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
A. factor
B. market
C. index
A factor model portfolio has a beta of 1 one factor, with zero betas on other factors.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
10-38
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McGraw-Hill Education.
10. The exploitation of security mispricing in such a way that risk-free economic profits may
be earned is called
A. arbitrage.
C. factoring.
D. fundamental analysis.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
11. In developing the APT, Ross assumed that uncertainty in asset returns was a result of
B. firm-specific factors.
C. pricing error.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: APT
10-39
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McGraw-Hill Education.
12. The ____________ provides an unequivocal statement on the expected return-beta
relationship for all assets, whereas the _____________ implies that this relationship holds
for all but perhaps a small number of securities.
A. APT, CAPM
B. APT, OPM
C. CAPM, APT
D. CAPM, OPM
The CAPM is an asset-pricing model based on the risk/return relationship of all assets.
The APT implies that this relationship holds for all well-diversified portfolios, and for all
but perhaps a few individual securities.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: APT and CAPM
10-40
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
13. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%.
Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is
6%. If you wanted to take advantage of an arbitrage opportunity, you should take a short
position in portfolio __________ and a long position in portfolio _______.
A. A, A
B. A, B
C. B, A
D. B, B
A: 16% = 1.0F + 6%; F = 10%; B: 12% = 0.8F + 6%: F = 7.5%; thus, short B and take a long
position in A.
AACSB: Analytic
Blooms: Apply
Difficulty: Intermediate
Topic: APT
10-41
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
14. Consider the single factor APT. 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 of
return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take
a short position in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
A: 13% = 10% + 0.2F; F = 15%; B: 15% = 10% + 0.4F; F = 12.5%; therefore, short B and
take a long position in A.
AACSB: Analytic
Blooms: Apply
Difficulty: Intermediate
Topic: APT
15. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The
beta of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-
diversified portfolio is approximately
A. 3.6%.
B. 6.0%.
C. 7.3%.
D. 10.1%.
AACSB: Analytic
Blooms: Apply
Difficulty: Intermediate
10-42
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Topic: APT
16. Consider the one-factor APT. The standard deviation of returns on a well-diversified
portfolio is 18%. The standard deviation on the factor portfolio is 16%. The beta of the
well-diversified portfolio is approximately
A. 0.80.
B. 1.13.
C. 1.25.
D. 1.56.
AACSB: Analytic
Blooms: Apply
Difficulty: Intermediate
Topic: APT
17. Consider the single-factor APT. Stocks A and B have expected returns of 15% and 18%,
respectively. The risk-free rate of return is 6%. Stock B has a beta of 1.0. If arbitrage
opportunities are ruled out, stock A has a beta of
A. 0.67.
B. 1.00.
C. 1.30.
D. 1.69.
E. 0.75.
AACSB: Analytic
Blooms: Apply
10-43
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Difficulty: Intermediate
Topic: APT
18. Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a
beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on the factor 1
portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if
no arbitrage opportunities exist?
A. 2%
B. 3%
C. 4%
D. 7.75%
AACSB: Analytic
Blooms: Apply
Difficulty: Challenge
Topic: APT
10-44
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
19. Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on
factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and factor 2
portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected
return on portfolio A is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 15.0%
C. 16.5%
D. 23.0%
AACSB: Analytic
Blooms: Apply
Difficulty: Intermediate
Topic: APT
20. Consider the multifactor APT with two factors. The risk premiums on the factor 1 and
factor 2 portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor 1, and a
beta of 0.7 on factor 2. The expected return on stock A is 17%. If no arbitrage opportunities
exist, the risk-free rate of return is
A. 6.0%.
B. 6.5%.
C. 6.8%.
D. 7.4%.
AACSB: Analytic
Blooms: Apply
Difficulty: Intermediate
10-45
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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decentration of the eye as if a prism were prescribed, nature
supplying its own decentration.
Exophoria
An Assumed Case
We will assume a case where 42 degrees is required to enable
the patient to first see the red streak as produced by the Maddox rod
to the extreme left. Through a continued gradual reduction of 4
degrees (or to 38 degrees), we next learn that the streak was carried
over until it bisected the white spot of light, giving single binocular
vision and producing a position of rest.
Fig. 28—Simplified chart showing the
prism action employed in developing a
weak ocular muscle through alternating
prism exercise. Either side of 38° in
excess of 4° causing diplopia.
The patient has now established the limitation of the exercise,
which is four degrees, this limitation being determined by the
difference between the point where the streak was first seen to the
extreme side and where it bisected the spot. The same amount of
four degrees should then be used for the opposite side, thus
reducing the prism strength to 34 degrees.
This again produces diplopia, because of the lesser amount of
prism power employed to give single binocular vision. The
refractionist should then return to 38 degrees, where single binocular
vision had originally been determined (Fig. 28), alternating back to
42, returning to 38, over to 34, back to 38, and so on. This procedure
should be employed once a day just after meals for about five
minutes, and repeated ten times, constantly striving for a slight
reduction of prism power from day to day.
1st—6D of Exophoria.
2nd—18° adduction (which must be developed to 24°).
3rd—Patient has a left weak internus.
11. Employ First Method—Optical Correction—to effect
treatment.
12. Assuming a case of a child with 6° of esophoria—8° of right
abduction and 2° left abduction indicating a left weak externus,
prescribe a quarter diopter increased plus spherical power for each
degree of imbalance, thus adding +1.50D spherical to optical
correction. This is the first method of treatment. This requires a
thorough reading of Chapter IX on Treatment for Correcting
Esophoria in Children and a careful study of the formula. For
synopsis see Page 74.
Prisms
1st. Where a case cannot be reduced through use of first two
methods, as for example in a case of 6° of exophoria, prescribe ¼ of
amount of imbalance (¼ × 6 = 1½°) for each eye—base in—or
esophoria base out, hyperphoria base up on eye affected.
2nd. Advise patient to call every three months and make duction
test (Fig. 24). If no improvement in condition, after wearing prisms
six months, operative means is suggested.
Assume a case is benefited, reduce prism power according to
rule; ¼D prism for each degree of imbalance.
Cyclophoria
This work being of a technical nature, it is deemed best for the
reader to study Chapter XIII and XIV.
Chapter XIII
CYCLOPHORIA