31. A zero-investment portfolio with a positive expected return arises when _________.
A. an investor has downside risk only
B. the law of prices is not violated
C. the opportunity set is not tangent to the capital allocation line
D. a risk-free arbitrage opportunity exists
E. a risk-free arbitrage opportunity does not exist
32. An investor will take as large a position as possible when an equilibrium price relationship is violated. This is an example of _________.
A. a dominance argument
B. the mean-variance efficiency frontier
C. a risk-free arbitrage
D. the capital asset pricing model
E. the SML
33. The APT differs from the CAPM because the APT _________.
A. places more emphasis on market risk
B. minimizes the importance of diversification
C. recognizes multiple unsystematic risk factors
D. recognizes multiple systematic risk factors
E. places more emphasis on systematic risk
34. The feature of the APT that offers the greatest potential advantage over the CAPM is the ______________.
A. use of several factors instead of a single market index to explain the risk-return relationship
B. identification of anticipated changes in production, inflation, and term structure as key factors in explaining the risk-return relationship
C. superior measurement of the risk-free rate of return over historical time periods
D. variability of coefficients of sensitivity to the APT factors for a given asset over time
E. superior measurement of the risk-free rate of return over historical time periods and variability of coefficients of sensitivity to the APT factors for a given asset over time
35. In terms of the risk/return relationship in the APT
A. only factor risk commands a risk premium in market equilibrium.
B. only systematic risk is related to expected returns.
C. only nonsystematic risk is related to expected returns.
D. only factor risk commands a risk premium in market equilibrium and only systematic risk is related to expected returns.
E. only factor risk commands a risk premium in market equilibrium and only nonsystematic risk is related to expected returns.
36. The following factors might affect stock returns:
A. the business cycle.
B. interest rate fluctuations.
C. inflation rates.
D. the business cycle, interest rate fluctuations, and inflation rates.
E. the relationship between past FRED spreads.
37. Advantage(s) of the APT is(are)
A. that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios.
B. that the model does not require a specific benchmark market portfolio.
C. that risk need not be considered.
D. that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios and that the model does not require a specific benchmark market portfolio.
E. that the model does not require a specific benchmark market portfolio and that risk need not be considered.
38. Portfolio A has expected return of 10% and standard deviation of 19%. Portfolio B has expected return of 12% and standard deviation of 17%. Rational investors will
A. Borrow at the risk free rate and buy A.
B. Sell A short and buy B.
C. Sell B short and buy A.
D. Borrow at the risk free rate and buy B.
E. Lend at the risk free rate and buy B.
39. An important difference between CAPM and APT is
A. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition.
B. CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium.
C. implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments.
D. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition, CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium, implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments.
E. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition and assumes many small changes are required to bring the market back to equilibrium.
40. A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in
A. pure arbitrage.
B. risk arbitrage.
C. option arbitrage.
D. equilibrium arbitrage.
E. covered interest arbitrage.
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