Question #1 of 9 Question ID: 1253633

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) is more exible than CAPM in its application.

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

C) has fewer assumptions than CAPM.

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

Question #2 of 9 Question ID: 1253635

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

A) No arbitrage opportunities exist.

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

C) Security returns are normally distributed.

D) The market contains enough stocks so that unsystematic risk can be diversi ed
away.

Question #3 of 9 Question ID: 1253629

The risk free rate is 3.8 percent.

Factor risk premiums are:

C. (2 percent)
D. (10 percent)

Assume Silver Linings Fund has the following sensitivities to the factors:

Sensitivity to A is 0.5.
Sensitivity to B is 1.2.

Sensitivity to C is 2.1.
Sensitivity to D is 0.2.

The expected return on the Silver Linings Fund is:

A) 20.1 percent.

B) 16.8 percent.

C) 18.3 percent.

D) 14.5 percent.

Marcie Deiner is an investment manager with G&G Investment Corporation. She works with
a variety of clients who di er in terms of experience, risk aversion and wealth. Deiner
recently attended a seminar on multifactor analysis. Among other things, the seminar taught
how the assumptions concerning the Arbitrage Pricing Theory (APT) model are di erent
from those of the Capital Asset Pricing Model (CAPM). One of the examples used in the
seminar is below.

E(Ri) = Rf+ f1Bi,1 + f2Bi,2 + f3Bi,3

where:

f1 = 3.0%

f2 = −40.0%

f3 = 50.0%

Beta estimates for Growth and Value funds for a three factor model
Factor 1 Factor 2 Factor 3
Betas for Growth 0.5 0.7 1.2
Betas for Value 0.2 1.8 0.6

Question #4 - 5 of 9 Question ID: 1253631

For the model used as an example in the seminar, if the T-bill rate is 3.5%, what are the
expected returns for the Growth and Value Funds?

E(RGrowth) E(RValue)

A) 37.0% −37.9%

B) 93.0% 106.1%

C) 33.5% −41.4%

D) 3.1% −3.16%

Question #5 - 5 of 9 Question ID: 1253632

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

A) asset returns are normally distributed.

B) a large number of available assets for investment allow investors to eliminate non-
systematic risk through diversi cation.

C) asset returns are explained by a factor model.

D) no arbitrage opportunities are available to investors because capital markets are

Question #6 of 9 Question ID: 1253625

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

A) Security returns are normally distributed.

B) Assets are priced such that no arbitrage opportunities exist.

D) The process generating asset returns can be represented by a 5-factor model.

Carrie Marcel, CFA, has long used the Capital Asset Pricing Model (CAPM) as an investment
tool. Marcel has recently begun to appreciate the advantages of arbitrage pricing theory
(APT). She used reliable techniques and data to create the following two-factor APT
equation:

E(RP) = 6.0% + 12.0%βp,ΔGDP − 3.0%βp,ΔINF

Where ΔGDP is the change in GDP and ΔINF is the change in in ation. She then determines
the sensitivities to the factors of three diversi ed portfolios that are available for investment
as well as a benchmark index:

Sensitivity to
Portfolio Sensitivity to ΔINF
ΔGDP

Q 2.00 0.75
R 1.25 0.50

S 1.50 0.25
Benchmark
1.80 1.00
Index

Marcel is investigating several strategies. She decides to determine how to create a portfolio

from Q, R, and S that only has an exposure to ΔGDP. She also wishes to create a portfolio out
of Q, R, and S that can replicate the benchmark. Marcel also believes that a hedge fund,
which is composed of long and short positions, could be created with a portfolio that is
equally weighted in Q, R, S and the benchmark index. The hedge fund would produce a
return in excess of the risk-free return but would not have any risk.

Question #7 - 8 of 9 Question ID: 1253627

Which of the following statements least likely describes characteristics of the APT and the
CAPM?

A) Under the framework of CAPM, investors who are more risk averse should hold less
of the market portfolio and more of the risk-free asset.

B) Both models require the ability to invest in the market portfolio.

C) Both models assume rm-speci c risk can be diversi ed away.

Question #8 - 8 of 9 Question ID: 1253628

What is the APT expected return on a factor portfolio exposed only to ΔGDP?

A) 15.0%.

B) 3.0%.

C) 12.0%.

D) 18.0%.

Question #9 of 9 Question ID: 1253634

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) 36.0%.

B) 50.0%.

C) 28.0%.

D) 33.0%.