The Arbitrage Pricing Theory

Beta is best described as measuring the response of a stock's return to which one of the following?

• Risk-free rate

• Total risk

• Systematic risk

• Company-specific risk

• Unsystematic risk

Spectra Industries stock has an expected return of 9.8 percent for year X and the following betas: ßI = 1.2; ßGNP = 1.6; ßr = -1.4. The economic forecast for year X includes an increase in GNP of 3.4 percent, an increase in inflation of 2.1 percent, and an increase in interest rates of 0.75 percent. Year X actually saw GNP increase by 1.8 percent, inflation increase by 0.5 percent, and interest rates increase by 0.5 percent. The unsystematic risk of Spectra Industries produced a -1.4 percent return for year X. Which one of the following is the correct formula for determining the total return on Spectra Industries stock for Year X based on the factor model?

• Total return Year X = .098 + 1.2(.021 - .005) + 1.6(.034 - .018) + (-1.4)(.0075 - .005) + (-.014)

• Total return Year X = .098 + 1.2(.005 - .021) + 1.6(.018 - .034) + (-1.4)(.005 - .0075) + (-.014)

• Total return Year X = .098 + 1.2(.005) + 1.6(.018) + (-1.4)(.005) + (-.014)

• Total return Year X = .098 + 1.2(.021) + 1.6(.034) + (-1.4)(.0075) + (-.014)

• Total return Year X = 1.2(.005 - .021) + 1.6(.018 - .034) + (-1.4)(.005 - .0075) + (-.014)

Which one of the following statements is correct regarding beta?

• The higher the beta, the less reactive the stock's return is to the risk factor.

• Betas must either equal zero or be positive values.

• Beta can be used to measure both systematic and unsystematic risks.

• A. The vertical intercept of a security market line is equal to the stock's beta_{S&P 500.}

• Beta determines the slope of a security market line.

Which one of the following risks is least apt to be present in a fully-diversified portfolio?

• Inflation risk

• Exchange-rate risk

• Interest rate risk

• Company-specific risk

• Market risk

Which one of the following variables is most apt to equal zero when computing the return on a diversified portfolio?

• ß_GNP

• ß_I

• ß_r

• ϵ

• F_GNP

Investors are rewarded for accepting which of the following risks?

• Systematic risk only

• Unsystematic risk only

• Company-specific risk only

• Total risks

• Investors are not rewarded for any risks as they should diversify their holdings

Which one of these statements is correct regarding arbitrage pricing theory (APT)?

• APT is just another name for the capital asset pricing model.

• APT illustrates that systematic risks diminish as the number of securities in a portfolio increases.

• The APT model is limited to a single beta.

• The APT model expresses the relationship between systematic and unsystematic risk.

• The APT model can include several factors with their respective betas.

Which one of these statements is correct?

• Growth portfolios are associated with high average portfolio

• Value funds tend to purchase high market-to-book stocks rather than low market-to-book stocks.

• Empirical models are based entirely on proven financial theories.

• A stock with a high P/E is often considered to be "undervalued".

• Data mining is often presented as a key advantage of empirical modeling.

The expected return on a diversified portfolio will be most influenced by which one of the following, assuming the portfolio's market beta is 1.0?

• Unexpected employee strike at a firm whose stock is held in the portfolio

• Unexpected resignation of the CEO of a firm whose stock is held in the portfolio

• Unexpected spike in the general level of inflation

• Expected increase in market interest rates

• Expected release of a firm's new video game; the firm's stock is held in the portfolio

Which one of the following is the best example of systematic risk?

• Decrease in the availability of copper

• Decrease in the price of cotton

• Increase in corporate income taxes

• Increase in the number of independent writers

• Increase in the number of seats within a sports arena