INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Question
Chapter 10, Problem 5CP
Summary Introduction
To select: Reason of difference between arbitrage pricing model and capital pricing model.
Introduction : Arbitrage pricing model used when there is no equilibrium in prices. There is more probability to gain profit in the market. Capital pricing model has a fixed price of the assets and establishes a relation between return and risk of the market.
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According to Capital Asset Pricing theory (CAPM), in a competitive marketplace:
Group of answer choices
A. only systematic risk is rewarded.
B. only diversifiable risk is rewarded.
C. all types of risks are rewarded.
D. no risk is rewarded.
Capital Asset Pricing Model is based on certain assumptions, which have been criticized after empirical testing of the model. Discuss the critique of the model in the context of those assumption. Also discuss the empirical findings of the CAPM. What sort of models have been presented to overcome the drawbacks of CAPM?
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.
Chapter 10 Solutions
INVESTMENTS(LL)W/CONNECT
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- The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?arrow_forwardBoth the capital asset pricing model and the arbitrage pricing theory rely on the proposition that a no-risk, no-wealth investment should earn, on average, no return. Explain why this should be the case, being sure to describe briefly the similarities and differences between the CAPM and the APT. Also, using either of these theories, explain how superior investment performance can be established.arrow_forwardCarefully explain the Arbitrage Pricing Theory (APT). What is the main assumption the APT is built on? (b) With regard to market efficiency, what is meant by the term "anomaly"? Give two examples of market anomalies and explain why each is considered as an anomaly.arrow_forward
- . The Capital asset Pricing Model (CAPM) contends that there is systematic & unsystematic risk for an individual security. Which is the relevant risk variable & why it’s relevant?arrow_forwardThis is a generalized framework for analyzing the relationship between risk and return: a. capital asset pricing model b. diversification theory c. capital market line d. arbitrage pricing theoryarrow_forwardThe Capital Asset Pricing Model is usually adopted in a variety of circumstances but it does have some problems. Discuss with reference to actual cases.arrow_forward
- Which of the following statements are true about systematic risk? Select one or more: a. Beta is a measure of systematic risk in ALL asset pricing models b. Systematic risk can be fully eliminated by diversification С. Systematic risk can be traded among financial entities but cannot be destroyed or eliminated d. All stocks must have the same exposure/factor loading on systematic risk e. Systematic risk is priced f. The premia on systematic risk must always be higher than the risk-free rate Which statements are true of optimization? Select one or more: a. It is a general mathematical tool and can be used not only in portfolio optimization but many business problems b. When applied in real world setting we often use computers to estimate the optimum numerically rather than doing calculus by hand с. One of the earliest applications of optimization to business problems is Augustin Cournot's 1838 duopoly pricing model d. Optimization can only ever be as effective as the description of the…arrow_forwardThe capital asset pricing model expresses the cost of equity as a function of a return on riskless assets, a market premium, and: Select one:a. Unsystematic risk.b. None of these.c. The cost of debt.d. Systematic risk.arrow_forwardThe feature of the general version of the arbitrage pricing theory (APT) that offers the greatest potential advantage over the simple CAPM is the:a. Identification of anticipated changes in production, inflation, and term structure of interest rates as key factors explaining the risk–return relationship.b. Superior measurement of the risk-free rate of return over historical time periods.c. Variability of coefficients of sensitivity to the APT factors for a given asset over time.d. Use of several factors instead of a single market index to explain the risk–return relationship.arrow_forward
- A criticism of the CAPM is that it: А. utilizes too many factors. В. ignores the risk-free return C. ignores the return on the market portfolio. D. requires a single measure of systematic risk.arrow_forwardWhich of the following is false about diversification? Select one or more: a. diversification only works when returns on investments move in different ways b. diversification results in higher Sharpe ratios c. diversification reduces risk d. diversification eliminates riskarrow_forwardWhich of the following is not related to overall market variability. I am not satisfy give downvote A•Financial risk B•Interest rate risk C•Purchasing power risk D•Market riskarrow_forward
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