WorksheetsBFM 4283 The Arbitrage Pricing Theory
Total questions: 15
Worksheet time: 8mins
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
What is the main weakness of the Arbitrage Pricing Theory according to the text?
Lack of empirical evidence
Silent on appropriate risk factors
Inability to hedge risk
Complex mathematical calculations
What is the main difference between small firms and large firms according to the three-factor model?
Large firms are undervalued
Small firms have lower returns
Small firms are less sensitive to market factors
Large firms are inherently riskier
What is the purpose of the three-factor model developed by Fama and French?
To explain differences in stock returns
To identify undervalued firms
To predict stock prices
To eliminate all risk
What is the main advantage of the three-factor model over the Capital Asset Pricing Model?
It relies on normal distribution
It is based on a single factor
It includes more assumptions
It can hedge systematic risk
How can an investor create a zero beta portfolio?
By eliminating all risk
By investing in high-risk stocks
By shorting all factor portfolios
By increasing idiosyncratic risk
