1.Choose one question to answer from Section A. Answers need to be presented in an essay form. 2.The answer to the essay-type question in Section A should not exceed a 2-sided A4 size paper. 3.Answer all numerical questions in Section B. Show all your calculations. 4.All answers must be typed using font size 12.

5.Hand in your coursework to the student office on or
6.before the deadline and retain the receipt as proof of submission.

Section A: Essay Questions (50%)

Question 1:

Discuss whether the Arbitrage Pricing Model is a better model than the Capital Asset Pricing Model in estimating a security’s expected return.

Question 2:

Do financial instrument traded in the money markets and the capital markets have the same characteristics? Give examples to explain.

Question 3:

‘Market efficiency does not mean that share prices can be forecasted with accuracy’. Do you agree with this statement? Explain your answer.

Section B: Numerical Questions (50%)

Question 1: (20%)

Use the following information to answer part a to c.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns A and B is 0.4. The risk-free rate of return is 5%.

a.Find the proportion of the optimal risky portfolio that should be invested in stock B. b.Find the expected return on the optimal risky portfolio.
c.Find the standard deviation of the returns on the optimal risky portfolio.

Question 2: (15%)

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1.00. Portfolio Y has an expected return of 9.5% and a beta...

...Chapter 10
Arbitrage Pricing Theory and Multifactor Models of Risk and Return
Multiple Choice Questions
1. ___________ a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. Both CAPM and APT stipulate
D. Neither CAPM nor APT stipulate
E. No pricingmodel has found
Both models attempt to explain assetpricing based on risk/return relationships....

...
How far the CapitalAssetPricingModel has been successful in explaining asset returns, defining its approach and assumptions.
Semester 2013
Department of Accounting and Finance
Lord Ashcroft International Business School
Anglia Ruskin University
Table of Contents
Introduction…………………………………………………………………………......... 3...

...1.
In the context of the CapitalAssetPricingModel (CAPM) the relevant measure of risk is
A. unique risk.
B. beta.
C. standard deviation of returns.
D. variance of returns.
E. none of the above.
2.
In the context of the CapitalAssetPricingModel (CAPM) the relevant risk is
A. unique risk.
B. systematic risk.
C. standard deviation of returns.
D. variance of...

...of investors. Explain your reasoning
Undiversifiable (market )risk:
Market risk is the variability in all riskyassets caused by macroeconomic variables. This risk cannot be avoided, regardless of the amount of diversification. Systematic risk (Market risk) factors are those macroeconomic variables that affect the valuation of all riskyassets such as variability in the growth of the money supply, interest rate...

...Multifactor Models of Risk and Return. (QUESTIONS)
1. Both the capitalassetpricingmodel 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 CAPM and APT. Also, using either of these theories, explain how superior...

...following questions:
a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 12%, the Risk-Free Rate is 4%, and the Beta (b) for Asset "i" is 1.2.
b. Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 9%, the Expected Return on the Market Portfolio is 10%, and the Beta (b) for Asset "j" is 0.8.
c. What do you think the...

...CapitalAssetPricingModel (CAPM): Pros and Cons.
CAPM defines the relationship between risk and return. The premise of the model is that the expected investment return varies in direct proportion to its risk, i.e., the riskier the investment - the higher the return you should expect.
Shows:
• how much risk you are taking when investing in an instrument?
• whether the instrument is rightly priced
• whether you are...

...CAPITALASSETPRICINGMODEL
The CapitalAssetPricingModel deals with independent investor problems that needs to undergo the procedure of selection of securities involving risks. The investors need to select the most advantageous security that produces the best possible outcome. This model deals with the estimation of securities as well as it links the risk and...

1171 Words |
4 Pages

Share this Document

Let your classmates know about this document and more at StudyMode.com

## Share this Document

Let your classmates know about this document and more at StudyMode.com