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Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory

9. Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?

A. The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.

B. The price will change little, if at all, since the impact is primarily in the future.

C. The price will change little, if at all, since the market considers this information unimportant. D. The price will change little, if at all, since the market considers this information untrue. E. The price will change little, if at all, since the market has already included this information in the security's price.

Difficulty level: Easy

Topic: ANNOUNCEMENT EFFECTS Type: CONCEPTS

10. Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by: A. the expected part of the announcement. B. market inefficiency.

C. the unexpected part of the announcement. D. the systematic risk. E. None of the above.

Difficulty level: Medium

Topic: ANNOUNCEMENT EFFECTS Type: CONCEPTS

11. A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices. A. negative; anticipated B. positive; anticipated C. negative; unanticipated D. positive; unanticipated E. None of the above.

Difficulty level: Medium

Topic: INFLATION AND BETA Type: CONCEPTS

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Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory

12. If company A, a medical research company, makes a new product discovery and their stock rises 5%, this will have:

A. no effect on Company B's, a newspaper, stock price because it is a systematic risk element. B. no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.

C. a large effect on Company B's, a newspaper, stock price because it is a systematic risk element.

D. a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element.

E. None of the above.

Difficulty level: Easy

Topic: UNSYSTEMATIC RISK Type: CONCEPTS

13. What would not be true about a GNP beta?

A. If a stock's ? GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP.

B. If a stock's ? GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP.

C. It is a measure of risk.

D. It measures the impact of systematic risk associated with GNP. E. None of the above.

Difficulty level: Medium Topic: BETA

Type: CONCEPTS

14. If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic

response coefficient from inflation, ?I, would result in a change in any security return of ___ ?I. A. 9.2 B. 3.2 C. -3.2 D. 3.0 E. 6.2

Difficulty level: Easy

Topic: FACTORS AND INFLATION Type: CONCEPTS

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Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory

15. In a portfolio of risky assets, the response to a factor, Fi, can be determined by: A. summing the weighted ?i s and multiplying by the factor Fi. B. summing the Fi s.

C. adding the average weighted expected returns. D. summing the weighted random errors. E. All of the above.

Difficulty level: Medium Topic: FACTORS Type: CONCEPTS

16. In the one factor (APT) model, the characteristic line to estimate ?i passes through the origin, unlike the estimate used in the CAPM because:

A. the relationship is between the actual return on a security and the market index.

B. the relationship measures the change in the security return over time versus the change in the market return.

C. the relationship measures the change in excess return on a security versus GNP.

D. the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.

E. Cannot be determined without actual data.

Difficulty level: Challenge Topic: APT AND CAPM Type: CONCEPTS

17. The betas along with the factors in the APT adjust the expected return for: A. calculation errors. B. unsystematic risks.

C. spurious correlations of factors.

D. differences between actual and expected levels of factors. E. All of the above.

Difficulty level: Challenge Topic: BETAS AND FACTORS Type: CONCEPTS

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Chapter 12 - An Alternative View of Risk and Return: The Arbitrage Pricing Theory

18. The single factor APT model that resembles the market model uses _________ as the single factor.

A. arbitrage fees B. GNP

C. the inflation rate D. the market return E. the risk-free return

Difficulty level: Easy

Topic: SINGLE FACTOR APT Type: CONCEPTS

19. For a diversified portfolio including a large number of stocks, the: A. weighted average expected return goes to zero. B. weighted average of the betas goes to zero.

C. weighted average of the unsystematic risk goes to zero. D. return of the portfolio goes to zero.

E. return on the portfolio equals the risk-free rate.

Difficulty level: Easy

Topic: UNSYSTEMATIC RISK AND DIVERSIFICATION Type: CONCEPTS

20. Which of the following statements is true?

A. A well-diversified portfolio has negligible systematic risk. B. A well-diversified portfolio has negligible unsystematic risk. C. An individual security has negligible systematic risk. D. An individual security has negligible unsystematic risk. E. Both A and D.

Difficulty level: Easy

Topic: UNSYSTEMATIC RISK AND DIVERSIFICATION Type: CONCEPTS

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