Reading 66: Portfolio Concepts-LOS l 习题精选 2011, including, expected, relation, return

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Session 18: Portfolio Management: Capital Market Theory and the Portfolio Management Process
Reading 66: Portfolio Concepts

LOS l: Discuss the arbitrage pricing theory (APT), including its underlying assumptions and its relation to the multifactor models, calculate the expected return on an asset given an asset's factor sensitivities and the factor risk premiums, and determine whether an arbitrage opportunity exists, including how to exploit the opportunity.

 

 

Which of the following statements about multifactor models is CORRECT?

A) The multifactor model is a time-series regression that explains variation in one asset.

B) The multifactor model is a cross-sectional equilibrium pricing model that explains variation across assets.

C) The intercept term in a macroeconomic factor model is the risk-free rate.

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The multifactor model is a time-series regression that explains variation in one asset. APT is a cross-sectional equilibrium pricing model that explains variation across assets. The intercept term in a macroeconomic factor model is the asset's expected return.

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Which of the following statements regarding the arbitrage pricing theory (APT) as compared to the capital asset pricing model (CAPM) is least accurate? APT:

A) does not require that one of the risk factors is the market portfolio; unlike the CAPM.

B) is often times thought of as a special case of the CAPM.

C) has fewer assumptions than CAPM.

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The CAPM is often times thought of as a special case of the APT since CAPM has only one factor, the market portfolio.

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Which of the following is not an assumption of the arbitrage pricing theory (APT)?

A) Returns on assets can be described by a multi-factor process.

B) Security returns are normally distributed.

C) The market contains enough stocks so that unsystematic risk can be diversified away.

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APT does not require that security returns be normally distributed.

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Which of the following is an assumption of the arbitrage pricing theory (APT)?

A) Returns are normally distributed.

B) No arbitrage opportunities exist.

C) Investors have quadratic utility functions.

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APT assumes that:

• Asset returns are described by a multiple factor process.
• There are enough stocks that unsystematic risk can be diversified away.
• No arbitrage opportunities exist.

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The factor risk premium on factor j in the arbitrage pricing theory (APT) can be interpreted as the:

A) expected risk premium investors require on a factor portfolio for factor j.

B) sensitivity of the market portfolio to factor j.

C) expected return investors require on a factor portfolio for factor j.

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We can interpret the APT factor risk premiums similar to the way we interpret the market risk premium in the CAPM. Each factor price is the expected risk premium (extra expected return minus the risk-free rate) investors require for a portfolio with a sensitivity of one (β_p,j =1) to that factor and a sensitivity of zero to all the other factors (a factor portfolio).

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The Arbitrage Pricing Theory (APT) has all of the following characteristics EXCEPT it:

A) is an equilibrium pricing model.

B) assumes that asset returns are described by a factor model.

C) assumes that arbitrage opportunities are available to investors.

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The APT assumes that no arbitrage opportunities are available to investors.

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Which of the following is an equilibrium-pricing model?

A) The arbitrage pricing theory (APT).

B) Macroeconomic factor model.

C) Fundamental factor model.

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The APT is an equilibrium-pricing model; multi-factor models are “ad-hoc,” meaning the factors in these models are not derived directly from an equilibrium theory. Rather they are identified empirically by looking for macroeconomic variables that best fit the data.

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If the arbitrage pricing theory (APT) holds, it determines:

A) the intercept term in a multi-factor model.

B) factor sensitivities in a multi-factor model.

C) the factor prices in a multi-factor model.

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One way to think about the relationship between the APT and multi-factor models is to recognize that the intercept term in a multi-factor model is the asset’s expected return; the APT is an expected return model that tells us what that intercept should be.

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One of the assumptions of the arbitrage pricing theory (APT) is that there are no arbitrage opportunities available. An arbitrage opportunity is:

A) a factor portfolio with a positive expected risk premium.

B) an investment that has an expected positive net cash flow but requires no initial investment.

C) a portfolio with factor exposures that sum to one.

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One of the three assumptions of the APT is that there are no arbitrage opportunities available to investors among these well-diversified portfolios. An arbitrage opportunity is an investment that has an expected positive net cash flow but requires no initial investment.

All factor portfolios will have positive risk premiums equal to the factor price for that factor. An arbitrage opportunity does not necessarily require a return equal to the risk-free rate, and the factor exposures for an arbitrage portfolio are all equal to zero.

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Given a three-factor arbitrage pricing theory (APT) model, what is the expected return on the Premium Dividend Yield Fund?

• The factor risk premiums to factors 1, 2 and 3 are 8%, 12% and 5%, respectively.
• The fund has sensitivities to the factors 1, 2, and 3 of 2.0, 1.0 and 1.0, respectively.
• The risk-free rate is 3.0%.

A) 33.0%.

B) 50.0%.

C) 36.0%.

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The expected return on the Premium Dividend Yield Fund is 3% + (8.0%)(2.0) + (12.0%)(1.0) + (5.0%)(1.0) = 36.0%.

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