Chap 10 finance

The multifactor model provide a better description of: Multiple choice question. risk appetite of investors inflation in the market exchange rate fluctuations security returns

D

A well-diversified portfolio constructed to have a beta of one on one factor and a beta of zero on any other factors is referred to as a(n)

factor portfolio

Coefficients are sometimes called factor _________or, factor ________ .

loadings, or betas

A model of security returns that allows several sources of systematic risk is referred to as a(n) __________model.

multifactor

Speculation on perceived mispriced securities, usually in connection with merger and acquisition targets, is referred to as_________ __________

risk arbitrage

A model of security returns that acknowledges only one source of systematic risk is a______ -_______ model.

single Factor

The Fama and French extension to their three-factor model is the five-factor model, which includes the additional components of a profitability factor and a(n)_________ factor.

Investment

The multidimensional SML predicts that the contribution of each source of risk to a security's total risk premium equals the factor Blank______ times the Blank______ of the factor portfolio tracking that source of risk. Multiple choice question. beta; risk premium variance; expected return variance; risk premium beta; expected return

A

Which of the following statements about APT are true? Multiple select question. It is based on the premise that a rational capital market would eliminate arbitrage opportunities. When the APT's pricing relationships are violated, there is less pressure to restore them. It is not necessary for nearly all investors to be mean-variance optimizers.

A and C

Which of the following statements regarding smart-beta ETFs are true? Multiple select question. allow investors to tailor portfolio exposures either toward or away from extra-market risk factors. track a broad market index using market capitalization weights. are analogous to index ETFs but are funds designed to provide exposure to characteristics like value, growth, or volatility.

A and C

Which statements are true of the security market line? Multiple select question. If a well-diversified portfolio did not lie on it, there would be an arbitrage opportunity. Its slope is the expected return of the market. It intersects the y-axis at the risk-free rate.

A and C

Which statements are true of empirical approaches like the Fama-French Three-Factor Model? Multiple select question. Extra-market factors cannot be clearly identified with a source of systematic risk. Some of the same risk factors have been found to predict average returns in different time periods and markets. The factors that are used are generated from theoretical models. Factors found empirically may be due purely to chance.

A, B and D

Which of the following statements correctly describes both APT and the CAPM? Multiple select question. A. For both APT and the CAPM, a risk source generates a risk premium that can be described by a security market line. B. Both APT and the CAPM decompose the risk into market versus firm-specific influences. C. Both APT and the CAPM are derived from a no-arbitrage condition. D. Both APT and the CAPM allows to include multiple factors.

A, B, and D

What are the key assumptions of APT? Multiple select question. A. Security returns can be described by a factor model. B. Investors have homogeneous expectations, and their common planning horizon is a single period. C. Well-functioning security markets do not allow for the persistence of arbitrage opportunities. D. There are sufficient securities to diversify away idiosyncratic risk.

A, C, and D

Which of the following are examples of systematic risk affecting APT? Multiple select question. interest rates uncertainty in the business cycle e-commerce energy prices

A,B and D

The exploitation of security mispricing in such a way that risk-free profits can be earned is called______

Arbitrage

Practitioners often use the term ________ to describe someone who searches for appealing investment opportunities and not just to someone who searches for risk-free profits as might be expected.

Arbitrageur

A well-diversified portfolio is one where the weight on each security is sufficiently small such that for practical purposes the Blank______ of the portfolio is zero. Multiple choice question. total variance nonsystematic variance systematic variance sum of the systematic and nonsystematic variances

B

If an arbitrage opportunity exists because the Law of One Price is violated, then an investor will want to take a position that: Multiple choice question. depends on his or her risk aversion. is infinite. depends on his or her wealth. depends on his or her risk aversion and wealth.

B

A well-diversified portfolio is one where the weight on each security is sufficiently small such that for practical purposes the Blank______ of the portfolio is zero. systematic variance total variance nonsystematic variance sum of the systematic and nonsystematic variances

C

Which is the formula for a two-factor APT model? Multiple choice question. Ri = E(Ri) × βi1F1 × βi2F2 × ei E(Ri) = Ri + βi1F1 + βi2F2 + ei Ri= E(Ri) + βi1F1 + βi2F2 + ei E(Ri) = Ri βi1F1 × βi2F2 × ei

C

Since Blank______ in well-diversified portfolios, it Blank______ the security market line. Multiple select question. nonsystematic risk does not cancel out; does affect systematic risk cancels out; does not affect systematic risk does not cancel out; does affect nonsystematic risk cancels out; does not affect

C, and D

Similar to CAPM, the APT predicts ______ _______ ______ a linking expected returns to risk, but the path it takes to the SML is decidedly different.

Security Market Line

he graphical representation of the relationship between the beta of a security and its excess return is referred to as the ______ - _______ line.

Security Market Line

_______- ________ETFs allow investors to tailor portfolio exposures either toward or away from a range of extra-market risk factors using easy-to-trade index products.

Smart-Beta

True or false: Coefficients of factors measure the sensitivity of share returns for the factor.

True

A portfolio with no net value, established by buying and shorting component securities, usually in the context of an arbitrage strategy, is referred to as a(n) __________-__________ portfolio.

Zero-Investment