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WorksheetsThe Arbitrage Pricing Theory
Total questions: 10
Worksheet time: 7mins
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 betaS&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?
ßGNP
ßI
ßr
ϵ
FGNP
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
