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1 | |
Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios? |
| | A) | The multifactor APT. |
| | B) | The CAPM. |
| | C) | Both the CAPM and the multifactor APT. |
| | D) | Neither the CAPM nor the multifactor APT. |
| | E) | None of the above is a true statement. |
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2 | |
The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called |
| | A) | factoring. |
| | B) | capital asset pricing. |
| | C) | arbitrage. |
| | D) | fundamental analysis. |
| | E) | none of the above |
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3 | |
A zero-investment portfolio with a positive expected return arises when |
| | A) | an investor has downside risk only. |
| | B) | the opportunity set is not tangent to the capital allocation line. |
| | C) | a risk-free arbitrage opportunity exists. |
| | D) | the law of prices is not violated. |
| | E) | none of the above |
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4 | |
The APT differs from the CAPM because the APT |
| | A) | places more emphasis on market risk. |
| | B) | recognizes multiple systematic risk factors. |
| | C) | recognizes multiple unsystematic risk factors. |
| | D) | minimizes the importance of diversification. |
| | E) | all of the above |
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5 | |
The following factors might affect stock returns: |
| | A) | interest rate fluctuations. |
| | B) | the business cycle. |
| | C) | inflation rates. |
| | D) | A and B. |
| | E) | all of the above |
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6 | |
Portfolio X has expected return of 10% and standard deviation of 19%. Portfolio Y has expected return of 12% and standard deviation of 17%. Rational investors will |
| | A) | borrow at the risk free rate and buy X. |
| | B) | sell Y short and buy X. |
| | C) | sell X short and buy Y. |
| | D) | borrow at the risk free rate and buy Y. |
| | E) | lend at the risk free rate and buy Y. |
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7 | |
A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in |
| | A) | risk arbitrage. |
| | B) | option arbitrage. |
| | C) | pure arbitrage. |
| | D) | equilibrium arbitrage. |
| | E) | none of the above |
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8 | |
Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements?
I) The expected return-beta relationship is maintained for all individual securities.
II) The expected return-beta relationship is maintained for all well-diversified portfolios.
III) The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios.
IV) The expected return-beta relationship is maintained for all but a small number of individual securities. |
| | A) | I and |
| | B) | I and |
| | C) | II and |
| | D) | II and |
| | E) | Only IV is correct. |
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9 | |
To take advantage of an arbitrage opportunity, an investor would
I) short sell the asset in the low-priced market and buy it in the high-priced market.
II) construct a zero investment portfolio that will yield a sure profit.
III) make simultaneous trades in two markets without any net investment.
IV) construct a zero beta investment portfolio that will yield a sure profit. |
| | A) | I and IV |
| | B) | I and III |
| | C) | II and III |
| | D) | I, III, and IV |
| | E) | II, III, and IV |
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10 | |
Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected return? |
| | A) | 7.0% |
| | B) | 8.0% |
| | C) | 9.2% |
| | D) | 13.0% |
| | E) | 13.2% |
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