Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory
33. The Fama-French three factor model includes the following factors:
A. beta, expected return on the market, risk free rate of interest, a size factor, and a value factor. B. the market risk premium, a volume factor, and a size factor.
C. beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor.
D. the yield on corporate bonds, a size factor, and a market factor. E. None of the above.
Difficulty level: Medium
Topic: FAMA-FRENCH THREE FACTOR MODEL Type: CONCEPTS
34. A value company is defined as one that:
A. tends to have a lower average return than a growth company. B. tends to have higher average return than a growth company. C. has a high ratio of book equity to market equity. D. a and b. E. a and c.
Difficulty level: Medium Topic: VALUE COMPANY Type: CONCEPTS
35. The Fama-French three factor model predicts the expected return on a portfolio increases: A. linearly with its factor loading of the size factor. B. linearly with its factor loading of the volume.
C. exponentially with its factor loading of the size factor. D. exponentially with its factor loading of the volume factor. E. None of the above.
Difficulty level: Medium
Topic: FAMA-FRENCH THREE FACTOR MODEL Type: CONCEPTS
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Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory
36. The systematic response coefficient for productivity, ?p, would produce an unexpected change in any security return of __ ?Pif the expected rate of productivity was 1.5% and the actual rate was 2.25%. A. 0.75% B. -0.75% C. 2.25% D. -2.25% E. 1.5%
Ri = ?PFP = ?P(2.25 - 1.5) = 0.75 ?P
Difficulty level: Medium Topic: FACTORS AND RISK Type: PROBLEMS
37. Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.5. The portfolio has a beta of: A. 0.00 B. 0.50 C. 0.75 D. 1.00 E. 1.50
2/3(1.5) + 1/3(0) = 1.0 + 0 = 1.0
Difficulty level: Medium
Topic: SINGLE FACTOR APT Type: PROBLEMS
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Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory
38. Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common stock is: A. 3.2%. B. 4.0%. C. 7.2%. D. 8.0%. E. 9.0%.
4 + 0.8(9 - 4) = 8.0%
Difficulty level: Easy
Topic: CAPITAL ASSET PRICING MODEL Type: PROBLEMS
39. Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the
risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is: A. 0.89. B. 1.60. C. 2.40. D. 3.00.
E. It is impossible to calculate beta without the inflation rate. 12 = 4 + ?(9 - 4); 8 = 5?; ? = 8/5 = 1.60
Difficulty level: Medium Topic: BETA
Type: PROBLEMS
Suppose that we have identified three important systematic risk factors given by exports,
inflation, and industrial production. In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively. However, actual growth in these factors turns out to be 1%, -2%, and 2%. The factor betas are given by ?EX = 1.8, ?I = 0.7, and ?IP = 1.0.
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Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory
40. If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock's total return. A. 2.95% B. 4.95% C. 6.55% D. 7.40% E. 8.85%
R = 6% + 1.8(.01 - -.01) + 0.7(-.02 - .025%) + 1(.02 - .035%) + 0 = .0495
Difficulty level: Medium
Topic: ARBITRAGE PRICING THEORY Type: PROBLEMS
41. Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return. A. 7.95% B. 9.95% C. 11.55% D. 7.90% E. 9.35%
R = 4.95% + 5% = 9.95%.
Difficulty level: Medium
Topic: ARBITRAGE PRICING THEORY Type: PROBLEMS
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