BFM 4283 The Arbitrage Pricing Theory

What is the name of the chapter in the book 'Foundations of Risk Management' that discusses Arbitrage Pricing Theory and multi-factor models of risk and return?

• Chapter on Asset Valuation

• Chapter on Arbitrage Pricing Theory

• Chapter on Portfolio Management

• Chapter on Financial Markets

Who developed the Capital Asset Pricing Model in 1964?

• William Sharp

• Harry Markowitz

• Stephen Ross

• Eugene Fama

What is the analogy used by the teacher to describe the restricted area of the Capital Asset Pricing Model?

• Garbage disposal

• Star Wars movie

• Radio communication

• Economic training

Which model was developed as an alternative pricing theory to the Capital Asset Pricing Model with fewer assumptions?

• Black-Scholes Model

• Markowitz Model

• Arbitrage Pricing Theory

• Monte Carlo Simulation

What is the main advantage of the Arbitrage Pricing Theory over the Capital Asset Pricing Model?

• It is based on a single factor

• It has more assumptions

• It can hedge systematic risk

• It relies on normal distribution

Which two economists developed the three-factor model that includes size, book-to-market ratio, and market portfolio?

• William Sharp and Harry Markowitz

• Eugene Fama and Ken French

• Harry Markowitz and Eugene Fama

• Stephen Ross and William Sharp

What does a beta of 1.5 indicate in the context of the three-factor model?

• High sensitivity to size factor

• 50% more sensitivity than the market portfolio

• No sensitivity to book-to-market ratio

• Low sensitivity to market portfolio

How can an investor hedge GDP factor risk while maintaining exposure to consumer sentiment factor?

• Short GDP factor portfolio and long consumer sentiment factor portfolio

• Long GDP factor portfolio and short consumer sentiment factor portfolio

• Long both GDP and consumer sentiment factor portfolios

• Short both GDP and consumer sentiment factor portfolios

What is the main purpose of creating a zero beta portfolio?

• To replicate the return on a treasury security

• To eliminate all risk

• To increase idiosyncratic risk

• To maximize systematic risk exposure

What is the term used to describe the return that is different from the expected return in a portfolio?

• Sharpe ratio

• Jensen's alpha

• Tracking error

• Treynor ratio