Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 7, Problem 4CP
Jeffrey Bruner, CFA, uses the
a. Both the CAPM and APT require a mean−variance
b. The CAPM assumes that one specific factor explains security return but APT does not. State whether each of the consultant’s arguments is correct o incorrect. Indicate, for each incorrect argument, why the argument is incorrect. (LO 7-5)
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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.
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.
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.
Chapter 7 Solutions
Essentials Of Investments
Ch. 7 - Prob. 1PSCh. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...Ch. 7 - You arc a consultant to a large manufacturing...
Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et
Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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- The theory is based on the notion that investors act rationally and consider all available information in the decision-making process, and hence investment markets are efficient, reflecting all available information in security prices. This describes Select one: a. conventional finance. b. irrational investors. c. behavioral finance. d. cognitive errors. e. None of the thesearrow_forwardHow does the Arbitrage Pricing Theory (APT) differ from and complement the Capital Asset Pricing Model (CAPM)? The Arbitrage Pricing Theory, developed by Stephen Ross, proposes that an asset's returns can be predicted using the linear relationship between the asset's expected return and a number of macroeconomic factors. Unlike CAPM, which uses a single factor (market risk), APT allows for multiple factors to explain asset returns, potentially providing a more comprehensive risk-return framework. These factors might include inflation, GDP growth, interest rates, or market indices. APT is based on the principle that arbitrage opportunities will be eliminated in efficient markets, leading to a pricing equilibrium. While more flexible than CAPM, APT faces challenges in identifying and measuring relevant factors. The theory has important implications for portfolio management, asset valuation, and our understanding of risk premiums in financial markets.arrow_forwardAll of the following statements about an efficient market are correct EXCEPT: a. All financial transactions have an NPV of equal to zero b. A skilled individual may have sustainable above market returns c. The investor is compensated properly for risk borne d. The investor does not receive abnormal returns consistentlyarrow_forward
- The Fama-French 3-factor model is a multi-factor models that includes two additional risk factors beyond the market risk factor in the CAPM model. These additional factors account for__________. A) Firm-specific risk that the CAPM does not measure. B) Sensitivities of an asset’s return related to its size and its ratio of book-to-market value. C) A and B are both correctarrow_forwardWhich of the following is NOT true? You might be better off using elimination approach for this question if your other courses (Financial Management, Investment/Portfolio Management) did not familiarize yourself with the concept of risk-neutrality. In risk-neutral valuation the risk-free rate is used to discount expected cash flows In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate O Derivatives can be valued based on the assumption that investors are risk neutral O Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral None of these (i.e. all are TRUE)arrow_forward6. Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? A) Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. B) Investors have homogeneous risk-averse preferences toward taking on risk. C) Investors hold only efficient portfolios of traded securities, that is portfolios that yield the maximum expected return for the given level of volatility. D) 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.arrow_forward
- 1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.arrow_forwardThe 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.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_forward
- Which of the following is not a characteristic of an efficient market? Investors can frequently make profits by predicting asset market prices that are different from intrinsic values. The market value of all securities at any one instant in time fully reflect all available information. Investors act rationally. The forces of demand and supply work to maintain that the security's market price and its intrinsic value are in equilibrium.arrow_forwardFama (2018) updated his original efficient market hypothesis by arguing that markets are informationally efficient, but not necessarily fully efficient. He proposed the idea of a "liquidity premium" to explain some deviations from fundamental values. DISCUSS.arrow_forwardAssume you want to test the Efficient Market Hypothesis (EMH) by comparing alternative trading rules to a buy-and-hold policy. Discuss the three common mistakes that can bias the results against the EMH.arrow_forward
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