LOS g: Discuss multifactor models as applied in a global context.

Q1. Which of the following statements about multifactor models is TRUE?

A)   Multifactor models should be limited to about four factors to prevent implausible results from occurring.

B)   Growth shares have a low price to book-value ratio.

C)   Analysts could use complex statistical procedures to model risk exposures.

Q2. Which of the following statements about multifactor models is TRUE?

A)   The momentum effect suggests that performance in the short-term is stable.

B)   It is usually difficult to use a global index in a particular industry as a proxy for the industry factor.

C)   When classifying stocks into certain categories, the country of origin does not matter.

Q3. Which of the following statements about multifactor models is FALSE?

A)   The momentum, size, and value effects can easily be adapted to a global context.

B)   Beta measures the sensitivity of the returns to each factor.

C)   The random term in the equation represents diversifiable risk.

LOS g: Discuss multifactor models as applied in a global context. fficeffice" />

Q1. Which of the following statements about multifactor models is TRUE?

A)   Multifactor models should be limited to about four factors to prevent implausible results from occurring.

B)   Growth shares have a low price to book-value ratio.

C)   Analysts could use complex statistical procedures to model risk exposures.

Correct answer is C)

Growth shares have a high price to book-value ratio. There is no limit in the number of factors to be used for multifactor models.

Q2. Which of the following statements about multifactor models is TRUE?

A)   The momentum effect suggests that performance in the short-term is stable.

B)   It is usually difficult to use a global index in a particular industry as a proxy for the industry factor.

C)   When classifying stocks into certain categories, the country of origin does not matter.

Correct answer is A)

The momentum effect suggests that short-term past performance (good or bad) will continue in the short-term future. A relevant global index is often used as a proxy for the industry factor. There is a significant difference between countries in terms of criteria used to classify stocks into categories.

Q3. Which of the following statements about multifactor models is FALSE?

A)   The momentum, size, and value effects can easily be adapted to a global context.

B)   Beta measures the sensitivity of the returns to each factor.

C)   The random term in the equation represents diversifiable risk.

Correct answer is A)

Extreme caution must be taken with modeling the momentum, size, and value effects since different countries use different criteria in assessing variables such as size.

Q4. Assume a simple service firm earns only service revenue and incurs depreciation as its most significant expense. In the current year, there is 3 percent inflation. However, due to government regulations, the firm is unable to pass on any of the inflation to its customers. In real terms, the firm’s net income is: fficeffice" />

A)   correctly stated.

B)   overstated.

C)   understated.

Correct answer is A)

Depreciation expense is an example of historical cost accounting (no inflation taken into account). If there is also no inflation reflected in the service revenue, then from an economic and real standpoint, the net income is correctly stated.