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Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

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Question 41

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In his famous critique of the CAPM, Roll argued that the CAPM ________.

A) is not testable because the true market portfolio can never be observed
B) is of limited use because systematic risk can never be entirely eliminated
C) should be replaced by the APT
D) should be replaced by the Fama-French three-factor model

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

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Question 42

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The SML is valid for ________, and the CML is valid for ________.

A) only individual assets; well-diversified portfolios only
B) only well-diversified portfolios; only individual assets
C) both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets
D) both well-diversified portfolios and individual assets; well-diversified portfolios only

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

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Question 43

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Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%?

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 .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 stock with a beta of 1.3?

The expected return on the market is the risk-free rate plus the ________.

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

One can profit from an arbitrage opportunity by

The capital asset pricing model was developed by ________.

The measure of risk used in the capital asset pricing model is ________.

Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate?

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 ________.

According to the capital asset pricing model, a fairly priced security will plot ________.

Arbitrage is based on the idea that ________.

The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to ________.

The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock?

The possibility of arbitrage arises when ________.

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, and .8, respectively. What is your portfolio beta?

An investor should do which of the following for stocks with negative alphas?

The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%) , and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock?