p of answer choices Both theories assume that undiversifiable risk is priced. Both theories assume that diversifiable risk is priced Both theories assume investors will hold a well-diversified portfolio Both the first and second responses are true. Both the first and third responses are

p of answer choices Both theories assume that undiversifiable risk is priced. Both theories assume that diversifiable risk is priced Both theories assume investors will hold a well-diversified portfolio Both the first and second responses are true. Both the first and third responses are

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 10MC

See similar textbooks

Related questions

Q: Which of the following is a false statement of the market price of risk found in the Capital Market…

A: Portfolios that blend risk and return optimally are represented by the capital market line (CML).…

Q: Suppose the solid line represents the capital market line that results from a CAPM equilibrium and…

A: Indifference curve is an upward sloping convex curve where at any point on the curve, the utility of…

Q: The modern portfolio theory suggests that investors should keep the diversification of investment…

A: With reference to the portfolio, the term " minimum possible" refers to that investor expects…

Q: Evaluate the following statement: If CAPM (Capital Asset Pricing Model) holds, the expected return…

A: CAPM or Capital Asset Pricing Model is the formula that represents the relationship between the…

Q: The benefits of portfolio diversification are highest when the individual securities within the…

A: Explanation: A diversified portfolio provides the highest benefits when the securities are largely…

Q: 1. (a) Explain the capital asset pricing model (CAPM), its relationship to the security market line,…

A: Standard deviation is Calculated as follows

Q: . According to the Capital Asset Pricing Model,what measures the amount of risk that an individual…

A: Beta: Beta can be defined as the measure of instability of a separate stock relative to the…

Q: True or False. and briefly explain. a. Under the Capital Asset Pricing Model (CAPM), if a stock has…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Compare and contrast the Markowitz Portfolio Theory (MPT) with the Capital Asset Pricing Model…

A: Markowitz's theory compares how to make the portfolio in an efficient way so that the return is…

Q: Assess the following statements: The traditional liquidity premium theory states that long term…

A: The liquidity premium is the additional amount of return that is expected by the investor for…

Q: This question relates to the two types of risk and to diversification. a)What is specific risk?…

A: As per our guidelines, we are supposed to answer only 3 sub-parts (if there are multiple sub-parts…

Q: “The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by…

A: I do not completely agree with the following statement because Capital Asset pricing model is only…

Q: 1. The diversifiable risk of a portfolio: a. Is correlated with systematic risk. b. Can be made…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: An investor takes as large a position as possible when an equilibrium price relationship is…

A: If the equilibrium price is violated, the saver would purchase the lesser priced asset and…

Q: How to set-up this problem? Refer to the following example for part i) Risk-free rate of return = 3%…

Q: Derive CAPM and explain the concept of systematic risk.

A: Disclaimer:- “Since you have asked multiple question, we will solve the first question for you. If…

Q: In the capital asset pricing model, the beta coefficient is a measure of index of the degree of…

A: The Capital Asset Pricing Model (CAPM) is a mathematical model that describes the relationship…

Q: 6. Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model…

A: Capital Asset Pricing Model :- This model was developed by Sharpe Mossin and Lintner in 1960 . In…

Q: Capital asset pricing theory asserts that portfolio returns are best explained by:a. Economic…

A: Capital Asset Pricing Theory is used to determine the relationship between the systematic risk of an…

Q: Harry Markowitz is best known for: Group of answer choices C. Modern Portfolio Theory A. The…

A: markowitz model is a framework for analysis of risk and return and their inter relationship.

Q: The general arbitrage pricing theory (APT) differs from the single-factor capital asset pricing…

A: Arbitrage Pricing theory and Capital asset pricing model are the models used for determining the…

Q: “Value-weighted index could provide a better signal on the market condition to the investors as…

A: Value -weighted index -Index return equals the weighted average of the return of each component*…

Q: The feature of the general version of the arbitrage pricing theory (APT) that offers the greatest…

A: Arbitrage Pricing Theory (APT) states that the asset’s return can be determined by using the linear…

Q: What are the key differences between the Arbitrage Pricing Theory (APT) and the Capital Asset…

A: Portfolio management entails the planning, supervision, timing, rationalism, and conservatism…

Q: arket's Risk premium measures Select one: a. The market return plus the risk free rate. b. The…

A: The market risk premium represents the market participants demand extra return by increasing the…

Q: What is the Capital Asset Pricing Model (CAPM)? Derive the risk premium when beta is between 0 and…

A: Stock valuation is a quantitative approach that an analyst or management of the company undergoes…

Q: According to the Capital Asset Pricing Model CAPM, fairly priced securities: a. have positive betas…

A: According to the Capital Asset Pricing Model CAPM, fairly priced securities have zero alphas…

Q: According to modern portfolio theory, the idea that investors with different indifference curves…

A: Option Explanation a. Separation Theorem is a theory that postulates that, given efficient capital…

Q: Explain the following Financial Terminology and then determined the relationship between its.…

A: Efficient Portfolio – It is the Portfolio that lines on the CML (capital market line) and maximizes…

Q: Why would an investor prefer a constrained portfolio optimization approach?

A: Portfolio is a collection of securities or investments. Portfolio includes stocks, bonds, cash…

Q: The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta…

A: Capital asset pricing model is a formula that projects the relationship between systematic risk and…

Q: Whats the difference between a price momentum strategy and an earnings momentum strategy. Under what…

A: In order to receiving better returns after specific period of time, investors plan to invest first.…

Q: According to the capital asset pricing model (CAPM), which of the following statements is true (only…

A: The capital asset pricing model shows the relation between the systematic risk and expected rate of…

Q: Given a simple world with two assets, a bond fund and a stock fund, clearly detail the steps…

A: (1) Portfolios are plotted on the graph which is known as the efficient frontier. All the portfolios…

Q: Do you agree with the following statement? And explain why. “The Capital Asset Pricing Model [CAPM]…

A: The Capital Asset Pricing model is used to price securities based on its systematic risk. It…

Q: “The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by…

A: Capital asset pricing model only discounting the systematic hazard related with the venture and…

Q: Which one of the following is a property of a pure arbitrage portfolio? a. Negative investment. b.…

A: Arbitrage is the practice of purchasing and selling the same assets in multiple markets. This is…

Q: Why do we call alpha a “nonmarket” return premium? Why are high-alpha stocks desirable investments…

A: First, we understand the alpha Alpha (α) is a measurement of how portfolio manager performs. It is…

Q: Diversifiable risk_ a. cannot be diversified away b. can be diversified away by holding multiple…

A: Introduction: Diversifiable risk is also referred to as unsystematic risk. Diversifiable risk is the…

Q: Assume the Capital Asset Pricing Model is true and that all securities should lie along the line…

A: (A).Fairly valued:- If the market price of a security is equal to its genuine value, it is…

Q: Compare and contrast the risk versus expected rate of return tradeoff, the security market line, and…

A: Note: As per the guidelines, only one question is to be solved when multiple questions are posted.…

Q: Which of the following statements are true? Explain.a. A lower allocation to the risky portfolio…

A: Sharpe ratio=Expected return of portfolio -Risk free returnStandard Deviation of portfolio Option…

Q: a) Differentiate between value and growth stocks? Briefly summarise the evidence relating to the…

A: Since you have asked multiple questions, we will solve the first question for you. Please ask…

Question

How is the arbitrage pricing theory (APT) similar to the capital asset pricing model?

Group of answer choices

Both theories assume that undiversifiable risk is priced.

Both theories assume that diversifiable risk is priced

Both theories assume investors will hold a well-diversified portfolio

Both the first and second responses are true.

Both the first and third responses are true.

Definition Definition Model that illustrates the correlation between the expected return and risk of capital investment in stock. According to this model, the expected rate of return on equity is equal to the risk-free return added to a risk premium, which is based on the stock beta.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

In contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be in equilibrium.b. Uses risk premiums based on micro variables.c. Specifies the number and identifies specific factors that determine expected returns.d. Does not require the restrictive assumptions concerning the market portfolio.
According to the capital asset pricing model (CAPM), fairly priced securities should have __________. Select one: a. A fair return based on the level of systematic risk. b. A beta of 1. c. A return equal to the market return. d. A fair return based on the level of unsystematic risk.
An efficient capital market is best defined as a market in which security prices reflect which one of the following? Multiple Choice A Current inflation B A risk premium C All available information D The historical arithmetic rate of return E The historical geometric rate of return
Please answer both QUESTION 7 According to the capital asset pricing model (CAPM), fairly priced securities should have A. A non-zero alpha. в.A fair return based on the level of systematic risk. C. A fair return based on the level of unsystematic risk. D.A beta of 1. QUESTION 8 Diversification can increase fair return. True False
Which of the following best describes an investor's risk-return trade-off function? Group of answer choices Indifference curves Capital Asset Pricing Model Characteristic line Efficient portfolio Arbitrage Pricing Model
Describe why a fully diversified portfolio is said to have no unsystematic risk but has systematic risk? Then describe how the Arbritrage Pricing Theory (APT) has a cause and effect on the expected return of a security.
Which of the following statements is true? A. Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares. B. All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases. C. Security market line (SML) plots return against total risk which is measured by the standard deviation of returns. D. Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.
Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate Investors hold only efficient portfolios of traded securities. Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. Investors have homogeneous risk averse preferences toward taking on risk.
Which of the following statements regarding non-systematic risk, systematic risk and total risk is/are true? Select one or more:a. As the number of assets within a portfolio increases, the total risk of a portfolio will go to zero.b. A riskfree asset must have zero non-systematic risk.c. A well diversified portfolio must have zero systematic riskd. Under the Capital Asset Pricing Model (CAPM).an asset with zero systematic risk must have expected return equal to the riskfree rate.
Which of the following is correct with regards to Theories of Term Structure? When the shape of the yield curve depends on investors’ expectations about prospective prevailing interest rates, the Pure Exception Theory is being applied. When the economic outlook is improving, the yield curve inverts as it reflects no changes in inflation premium. The liquidity preference theory suggests that long-term rates are generally higher than short-term rates since investors perceive more liquidity in long-term investments. Under the Market segmentation theory, there is an apparent relationship between the yield curve and the prevailing rate of returns in each market segment.
Suppose the solid line represents the capital market line that results from a CAPM equilibrium and the dotted curves represent indifference curves for a given individual. Which of the following is correct if point M corresponds to the market portfolio? Group of answer choices The individual optimally holds only the market portfolio, M. The individual optimally holds portfolio B which can be partially characterized by a long position in the riskless asset. The individual optimally holds portfolio B which can be partially characterized by a short position in the riskless security The individual optimally holds portfolio A which can be partially characterized by a long position in the riskless security. None of the above.
Jeffrey Bruner, CFA, uses the capital asset pricing model (CAPM) to help identify mispriced securities. A consultant suggests Bruner use arbitrage pricing theory (APT) instead. In comparing CAPM and APT, the consultant makes the following arguments:a. Both the CAPM and APT require a mean-variance efficient market portfolio.b. Neither the CAPM nor the APT assumes normally distributed security returns.c. The CAPM assumes that one specific factor explains security returns but APT does not.State whether each of the consultant’s arguments is correct or incorrect. Indicate, for each incorrect argument, why the argument is incorrect.