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Exam 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory

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Question 21

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Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:

A) 0.89.
B) 1.60.
C) 2.40.
D) 3.00.

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

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Question 22

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Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:

A) the expected part of the announcement.
B) market inefficiency.
C) the innovation or unexpected part of the announcement.
D) the systematic risk.

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

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Question 23

Multiple Choice

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The unexpected return on a security, U, is made up of:

Which of the following statements is true?

A criticism of the CAPM is that it:

In normal market conditions or when the market is rising if a security has a negative beta:

The acronym APT stands for:

Both the APT and the CAPM imply a positive relationship between expected return and risk. The APT views risk:

The systematic response coefficient for productivity, $\beta$ _P, would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Suppose that we have identified three important systematic risk factors given by exports, inflation, and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2%, and 2%. The factor betas are given by $\beta$ _EX = 1.8, $\beta$ _I = 0.7, and $\beta$ _IP = 1.0. If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock's total return.

The term Corr( $\varepsilon$ _R, $\varepsilon$ _T) = 0 tells us that:

A factor is a variable that:

Style portfolios are characterized by:

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 single factor APT model that resembles the market model uses _____________ as the single factor.

In a portfolio of risky assets the response to a factor, F_i, can easily be determined by:

For a diversified portfolio including a large number of stocks,:

Systematic risk is defined as:

To estimate the cost of equity capital for a firm using APT or CAPM, it is necessary to have:

Suppose that we have identified three important systematic risk factors given by exports, inflation, and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2%, and 2%. The factor betas are given by $\beta$ _EX = 1.8, $\beta$ _I = 0.7, and $\beta$ _IP = 1.0. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return. Assume expected return on the stock is 6%.