T5 2011 - Fina 3104 L2 T5 Midterm exam announcement...

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Fina 3104 1 Fina 3104 L2 T5 § Midterm exam announcement § Practice Problems on CAPM and APT
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Fina 3104 2 Midterm Exam Date: Oct. 24, 2011 ( No lectures on Oct 24) Time: 7:30-9:30 pm (please come at least 10 mins before the exam starts) Venue: LTA Seating Plan: Please check the seating plan on LMES. Areas covered: Lecture 1 –Lecture 11 Formula sheet: It will be provided in our midterm
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Fina 3104 3 Q1a,b: Pracitce Problem 1(6 mins) True or False, explain (a) Over the past year, the realized return on stock A was 15% and on stock B was 12%. The betas of A and B are 0.7 and 1.3, respectively. So the past year’s performance definitely contradict the Index Model. (b) The Arbitrage Pricing Theory (APT) requires all investors to hold the portfolio that has the highest Sharpe ratio.
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Fina 3104 4 Solution a) FALSE. The realized return is different from the expected return. Surprises can come from firm-specific events. Therefore, it is possible that the return on Stock A, which has a lower beta, to have a higher realized return than Stock B. (Note: Using past data can never refute the Index Model “definitely” because you can only contradict it at a confidence level less than 100%.)
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Fina 3104 5 Solution b) FALSE. The APT does not place restrictions on investors’ portfolio choices. The APT holds as long as the securities returns follow a factor model, and there are well-diversified portfolios and no persistent arbitrage opportunities.
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Fina 3104 6 Q1c,d: Pracitce Problem 1(6 mins) True or False, explain (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
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This note was uploaded on 11/27/2011 for the course FINA 3104 taught by Professor Darwin during the Spring '11 term at HKUST.

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T5 2011 - Fina 3104 L2 T5 Midterm exam announcement...

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