INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Question
Chapter 10, Problem 8CP
Summary Introduction
To select: About the arbitrage pricing theory in contrast of the capital pricing model.
Introduction : The capital pricing model established a relation between expected return and the total risk of the portfolio. The return is the sum of the risk premium and the risk free rate of the portfolio. Arbitrage model is only applicable to the well-diversified portfolio.
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Students have asked these similar questions
The general arbitrage pricing theory (APT) differs from thesingle-factor capital asset pricing model (CAPM) because theAPT:
A. Places more emphasis on market risk.B. Minimizes the importance of diversification.C. Recognizes multiple unsystematic risk factors.D. Recognizes multiple systematic risk factors.
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.
This 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 theory
Chapter 10 Solutions
INVESTMENTS(LL)W/CONNECT
Ch. 10 - Prob. 1PSCh. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Prob. 4PSCh. 10 - Prob. 5PSCh. 10 - Prob. 6PSCh. 10 - Prob. 7PSCh. 10 - Prob. 8PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PS
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- 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_forwardExplain (i) the relation between market returns and investor sentiment, and (ii) the relation between market returns and conditional volatility. Discuss potential limitations of your work. Explain the relation between market returns and investor sentiment. Explain the relation between market returns and conditional volatility. Discuss limitations of your analysis.arrow_forwardThe Capital Asset Pricing Model (CAPM) asserts that an asset’s expected return is equal to the risk-free rate plus a risk premium for: a. Volatility b. Systematic risk c. Non-systematic risk d. Diversification e. Marginal utility of consumptionarrow_forward
- Capital asset pricing theory asserts that portfolio returns are best explained by:a. Economic factors.b. Specific risk.c. Systematic risk.d. Diversification.arrow_forwardWhat are the key differences between the Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) as they relate to portfolio management?arrow_forwardWhich of the statements about the Arbitrage Pricing Theory MUST BE TRUE. I. There is only one systematic risk, the market risk. II. The market risk factor must be one of many systematic risk factors. III. Individual assets may have a positive or negative alpha A. I only B. II only C. III only D. None of the abovearrow_forward
- The underlying assumptions of technical analysis are that A.price move in predictable patterns B. Market value is determined by market news C. Investors are rationalarrow_forwardExamine (i) the relation between market returns and investor sentiment, and (ii) the relation between market returns and conditional volatility. Discuss potential limitations of your work.arrow_forwardWhich of the following is NOT true? In risk-neutral valuation the risk-free rate is used to discount expected cash flows Options can be valued based on the assumption that investors are risk neutral Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free ratearrow_forward
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