Topic 12 Arbitrage Pricing Theory and Multifactor Models of Risk and Return.pdf

# Is more flexible than capm in its application has

• 5

This preview shows pages 2–5. Sign up to view the full content.

is more flexible than CAPM in its application. has fewer assumptions than CAPM. is often times thought of as a special case of the CAPM.

This preview has intentionally blurred sections. Sign up to view the full version.

Question ID: 438636 A) B) C) D) Questions #7-8 of 10 Question #7 of 10 Question ID: 638283 A) B) C) D) Which of the following is an assumption of the arbitrage pricing theory (APT)? The process generating asset returns can be represented by a 5-factor model. Security returns are normally distributed. Assets are priced such that no arbitrage opportunities exist. Investors have quadratic utility functions. Marcie Deiner is an investment manager with G&G Investment Corporation. She works with a variety of clients who differ in terms of experience, risk aversion and wealth. Deiner recently attended a seminar on multifactor analysis. Among other things, the seminar taught how the assumptions concerning the Arbitrage Pricing Theory (APT) model are different from those of the Capital Asset Pricing Model (CAPM). One of the examples used in the seminar is below. E(R ) = R + f B + f B + f B where: f = 3.0%, f = −40.0%, and f = 50.0%. Beta estimates for Growth and Value funds for a three factor model Factor 1 Factor 2 Factor 3 Betas for Growth 0.5 0.7 1.2 Betas for Value 0.2 1.8 0.6 For the model used as an example in the seminar, if the T-bill rate is 3.5%, what are the expected returns for the Growth and Value Funds? E(R ) E(R ) 3.1% −3.16% 93.0% 106.1% 37.0% −37.9% 33.5% −41.4% i f 1 i, 1 2 i, 2 3 i, 3. 1 2 3 Growth Value
Question #8 of 10 Question ID: 438627 A) B) C) D) Question #9 of 10 Question ID: 438633 A) B) C) D) Question #10 of 10 Question ID: 438631 Which of the following is

This preview has intentionally blurred sections. Sign up to view the full version.

This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern