_Index Models and APT_ Practice Problems

# _Index Models and APT_ Practice Problems - FINA 3104...

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1 FINA 3104 Practice Problems Fall 2011 Index Models and APT 1. True or False (Briefly Explain) (a) Over the past year, the realized return on stock A was 12% and on stock B was 10%. The betas of A and B are 0.8 and 1.2, respectively. So the past year’s performance definitely refutes the Index Model. (b) The Arbitrage Pricing Theory (APT) requires all investors to hold the portfolio that has the highest Sharpe ratio. (c) The Arbitrage Pricing Theory (APT) requires all investors to agree on securities’ expected returns, variances, and co-variances. (d) If you want to test the Capital Asset Pricing Model (CAPM) using historical returns, you need to run a regression of the securities’ returns on the market return, and examine the slope and the intercept of the regression. 2. Index Models and Arbitrage You believe that all securities are priced according to the following Index Model: For security i at time t , r it = r f + i ( r mt - r f ) + e it , where r f is the riskfree rate,

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_Index Models and APT_ Practice Problems - FINA 3104...

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