Question 1

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production. In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively. However,actual growth in these factors turns out to be 1%,-2%,and 2%. The factor betas are given by β_EX = 1.8,β_I = 0.7,and β_IP = 1.0. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return. A) -4.05% B) -2.05% C) 4.55% D) 0.40% E) 1.85%

Accepted Answer

The answer of Suppose that we have identified three important...

Question 2

Suppose the Carz Corporation's common stock has a beta of 0.9. If the risk-free rate is 3.5% and the expected market return is 9%,the expected return for JumpStart's common stock is:
A) 3.5%.
B) 8.45%.
C) 9.00%.
D) 9.15%.
E) 9.24%.

Accepted Answer

The expected return can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Substituting the given values: 3.5% + 0.9 * (9% - 3.5%) = 8.45%.

Question 3

An investor is considering the three stocks given below:
  Calculate the expected return and beta of a portfolio equally weighted between stocks B and C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stocks B and A.

Accepted Answer

The answer of An investor is considering the three stocks...

Question 4

Assume that the single factor APT model applies and a portfolio exists such that 1/2 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.8. The portfolio has a beta of:
A) 0.0.
B) 0.8.
C) 0.9.
D) 1.0.
E) 1.8.

Accepted Answer

The portfolio beta is the weighted average of the betas of the securities in the portfolio. Since half of the portfolio is invested in the risk-free asset (which has a beta of 0), and the other half in Security Q (which has a beta of 1.8), the portfolio beta is (0.5 * 0) + (0.5 * 1.8) = 0.9.

Question 5

The systematic response coefficient for productivity,β_p,would produce an unexpected change in any security return of __ β_P if the expected rate of productivity was 1.8% and the actual rate was 2.3%. A) 0.5% B) -0.5% C) 2.3% D) -2.3% E) 1.8%

Accepted Answer

The unexpected change in productivity is the difference between the actual rate (2.3%) and the expected rate (1.8%), which is 0.5%. The systematic response coefficient for productivity, β_p, would produce an unexpected change in any security return of 0.5% times β_p.

Question 6

Explain the conceptual differences in the theoretical development of the CAPM and APT.

Accepted Answer

The answer of Explain the conceptual differences in the theoretical...

Question 7

You have a 3 factor model to explain returns. Explain what a factor represents in the context of the APT?
 Each factor is multiplied by a beta. What do these represent and how do they relate to the actual return?

Accepted Answer

The answer of You have a 3 factor model to...

Question 8

Suppose the Binder Corporation's common stock has a return of 17%. Assume the risk-free rate is 5%,the expected market return is 8%,and no unsystematic influence affected Binder's return. The beta for Binder is:
A) 0.
B) 2.
C) 3.
D) 4.
E) It is impossible to calculate beta without the inflation ratE. 17 = 5 + β(8 - 5); β = 4

Accepted Answer

Using the capital asset pricing model (CAPM), we can calculate the beta of Binder Corporation as the slope of the regression line between the company's returns and the market returns. Thus, we can use CAPM to solve for beta as follows:

17% = 5% + β(8% - 5%)
12% = β(3%)
β = 4

Therefore, the correct answer is D, with a beta of 4.

Question 9

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production. In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively. However,actual growth in these factors turns out to be 1%,-2%,and 2%. The factor betas are given by β_EX = 1.8,β_I = 0.7,and β_IP = 1.0. Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return. A) 7.95% B) 9.95% C) 11.55% D) 7.90% E) 9.35%

Accepted Answer

The stock's total return is calculated by considering the unexpected changes in the factors and their respective betas, plus the additional return from the patent filing. The unexpected changes are: Exports (1% - (-1%)) = 2%, Inflation (-2% - 2.5%) = -4.5%, Industrial Production (2% - 3.5%) = -1.5%. The total return is: (1.8 * 2%) + (0.7 * -4.5%) + (1.0 * -1.5%) + 5% = 9.95%.

Question 10

Discuss the Fama-French three factor model; both what it means and the factors of the model.

Accepted Answer

The answer of Discuss the Fama-French three factor model; both...

Question 11

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production. In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively. However,actual growth in these factors turns out to be 1%,-2%,and 2%. The factor betas are given by β_EX = 1.8,β_I = 0.7,and β_IP = 1.0. What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent. A) 4% B) 5% C) 6% D) 7% E) 8%

Accepted Answer

The answer of Suppose that we have identified three important...

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

Suppose the Carz Corporation's common stock has a beta of 0.9. If the risk-free rate is 3.5% and the expected market return is 9%,the expected return for JumpStart's common stock is:

Assume that the single factor APT model applies and a portfolio exists such that 1/2 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.8. The portfolio has a beta of:

The systematic response coefficient for productivity,βp,would produce an unexpected change in any security return of __ βP if the expected rate of productivity was 1.8% and the actual rate was 2.3%.

Explain the conceptual differences in the theoretical development of the CAPM and APT.

You have a 3 factor model to explain returns. Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta. What do these represent and how do they relate to the actual return?

Suppose the Binder Corporation's common stock has a return of 17%. Assume the risk-free rate is 5%,the expected market return is 8%,and no unsystematic influence affected Binder's return. The beta for Binder is:

Discuss the Fama-French three factor model; both what it means and the factors of the model.

The systematic response coefficient for productivity,β_p,would produce an unexpected change in any security return of __ β_P if the expected rate of productivity was 1.8% and the actual rate was 2.3%.