Investments And Portfolio Management 9Th Edition By Alex – Test Bank

Investments And Portfolio Management 9Th Edition By Alex – Test Bank

Chapter 10
Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Multiple Choice Questions

1. ___________ a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. Both CAPM and APT stipulate
D. Neither CAPM nor APT stipulate
E. No pricing model has found

2. Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1 and a beta of .86 on factor 2. The risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no arbitrage opportunities exit?
A. 9.26%
B. 3%
C. 4%
D. 7.75%
E. 9.75%

3. In a multi-factor APT model, the coefficients on the macro factors are often called ______.
A. systemic risk
B. factor sensitivities
C. idiosyncratic risk
D. factor betas
E. both factor sensitivities and factor betas

4. In a multi-factor APT model, the coefficients on the macro factors are often called ______.
A. systemic risk
B. firm-specific risk
C. idiosyncratic risk
D. factor betas
E. unique risk

5. In a multi-factor APT model, the coefficients on the macro factors are often called ______.
A. systemic risk
B. firm-specific risk
C. idiosyncratic risk
D. factor loadings
E. unique risk

6. Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?
A. The CAPM
B. The multifactor APT
C. Both the CAPM and the multifactor APT
D. Neither the CAPM nor the multifactor APT
E. No pricing model currently exists that provides guidance concerning the determination of the risk premium on any portfolio.

7. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.
A. small positive
B. small negative
C. zero
D. large positive
E. large negative