Basics of FM (lecture) -APT

APT assumes that no (a)   opportunities exist in well-functioning markets.

What is arbitrage?

• Diversifying across multiple asset classes

• Exploiting price differentials for risk-free profit

• When stocks are priced the same on differenct markets

• Hedging against currency risk

What distinguishes APT from CAPM?

• APT uses multiple risk factors, while CAPM uses only one

• APT only applies to small companies

• APT requires holding the market portfolio

What is the main assumption of Arbitrage Pricing Theory (APT)?

• No arbitrage opportunities exist in well-functioning markets

• All investors hold the market portfolio

• Investors are irrational

• The risk-free rate is always zero

Who introduced Arbitrage Pricing Theory (APT)?

• Eugene Fama

• William Sharpe

• Stephen Ross

• Harry Markowitz

Which is true about the Capital Asset Pricing Model (CAPM)?

• It is less accurate than APT

• It uses multiple factors to estimate returns

• It assumes a single risk factor, the market portfolio

In APT, (a)   risk is explained by multiple factors.

In APT, β (beta) represents the sensitivity of an asset to a specific factor.

• True

• False

What is the risk premium in the context of APT?

• The return on the risk-free asset

• Compensation investors receive for taking on risk

• The cost of arbitrage

• The expected return on bonds

What is the main goal of using a multifactor model?

• To reduce the number of securities in a portfolio

• To identify multiple sources of risk affecting asset returns

• To calculate the intrinsic value of a stock

• To predict interest rates