Arbitrage Pricing Theory (APT) is primarily used to:
A) Predict stock prices
B) Evaluate bond yields
C) Estimate expected returns on assets
D) Analyze market liquidity
Answer: C
APT assumes that asset returns are influenced by:
A) A single factor only
B) Multiple factors
C) Market sentiment
D) Company size only
Answer: B
According to APT, an arbitrage opportunity exists when:
A) Expected returns equal actual returns
B) Actual returns exceed expected returns
C) Actual returns are lower than expected returns
D) Asset prices are mispriced relative to their factors
Answer: D
Which of the following is a key assumption of the APT model?
A) All investors have the same risk preferences
B) Asset returns follow a normal distribution
C) Market prices are perfectly efficient
D) Factors are uncorrelated with asset returns
Answer: C
In APT, a factor is defined as:
A) A variable that influences asset returns
B) The risk-free rate of return
C) The market index return
D) The standard deviation of asset prices
Answer: A
True or False: APT suggests that market equilibrium ensures no arbitrage opportunities.
A) True
B) False
Answer: A
The Capital Asset Pricing Model (CAPM) and APT both:
A) Use the same equation to estimate expected returns
B) Assume a single factor influences asset returns
C) Assume no arbitrage opportunities in the market
D) Require the same data inputs for calculation
Answer: C
Which of the following statements is true regarding the APT model?
A) It is based on the assumption that all investors have identical expectations
B) It requires historical data to predict future returns accurately
C) It can be used to identify mispriced securities
D) It does not consider any risk factors
Answer: C
The APT model was introduced by:
A) William F. Sharpe
B) Harry Markowitz
C) Stephen Ross
D) Eugene Fama
Answer: C
In the context of APT, a well-diversified portfolio:
A) Can eliminate all risk
B) Should have a higher expected return
C) Should have a lower expected return
D) Can achieve a higher return for a given level of risk
Answer: D
The APT model assumes that arbitrageurs:
A) Seek to maximize market efficiency
B) Ignore mispriced assets
C) Capitalize on mispriced assets
D) Predict all future market movements
Answer: C
According to APT, the expected return of an asset can be expressed as:
A) E(Ri) = Rf + βi (Rm – Rf)
B) E(Ri) = αi + βi (Rm – Rf)
C) E(Ri) = Rf + σi
D) E(Ri) = Rm – Rf
Answer: B
The APT model is based on the assumption that:
A) Asset prices are always correct
B) Factors are perfectly correlated
C) Market prices can be predicted
D) There are multiple factors influencing asset returns
Answer: D
The term “arbitrage” in APT refers to:
A) Buying and selling securities simultaneously to profit from price differences
B) Speculating on market trends
C) Predicting future returns accurately
D) Analyzing historical data for investment decisions
Answer: A
Which of the following factors is NOT typically included in an APT model?
A) Interest rates
B) Inflation rates
C) Industry-specific factors
D) Macroeconomic variables
Answer: C
True or False: APT requires the estimation of betas for each individual asset.
A) True
B) False
Answer: A
The APT model assumes that investors are:
A) Risk-averse
B) Risk-neutral
C) Risk-seeking
D) Indifferent to risk
Answer: B
The APT model can be used to:
A) Calculate the Sharpe ratio
B) Identify mispriced assets
C) Predict market crashes
D) Determine market volatility
Answer: B
APT’s reliance on factors rather than a single market index allows for:
A) Increased complexity in portfolio construction
B) Simplified risk assessment
C) Reduced need for diversification
D) Ignoring market trends
Answer: A
In APT, the systematic risk associated with an asset is captured by:
A) Its alpha coefficient
B) Its beta coefficients with respect to factors
C) The standard deviation of its returns
D) The mean return of the market index
Answer: B
Which of the following statements about APT factors is true?
A) Factors must be directly observable
B) Factors must be perfectly correlated
C) Factors must be orthogonal
D) Factors must be unrelated to asset returns
Answer: A
The APT model assumes that:
A) Investors always seek the highest return
B) Markets are perfectly efficient
C) Investors have identical expectations
D) Asset prices reflect all available information
Answer: D
The APT model is more suitable than CAPM for:
A) Analyzing single-factor risk
B) Estimating the risk-free rate
C) Handling multiple sources of risk
D) Calculating alpha coefficients
Answer: C
The APT model can be criticized for:
A) Ignoring market efficiency
B) Overemphasizing systematic risk
C) Being too simple in its approach
D) Assuming factors are always observable
Answer: D
The APT model suggests that mispriced assets will:
A) Attract arbitrageurs who will correct the pricing
B) Remain mispriced indefinitely
C) Be ignored by market participants
D) Lead to market crashes
Answer: A
True or False: APT can be applied only to equity markets and not to other asset classes.
A) True
B) False
Answer: B
Which of the following is NOT a step in applying the APT model?
A) Identifying relevant factors
B) Estimating factor returns
C) Calculating beta coefficients for each asset
D) Ignoring market prices
Answer: D
The APT model assumes that:
A) Investors are irrational
B) Factors are always observable
C) Markets are perfectly predictable
D) Arbitrage opportunities are quickly eliminated
Answer: D
In the context of APT, a well-diversified portfolio:
A) Eliminates all risks
B) Achieves a higher return for a given level of risk
C) Should include only high-risk assets
D) Has a lower expected return compared to concentrated portfolios
Answer: B
The APT model helps investors to:
A) Predict exact future returns
B) Calculate the exact risk of an asset
C) Identify mispriced securities
D) Eliminate all market risks
Answer: C
Which of the following is a limitation of the APT model?
A) It requires the estimation of a single factor
B) It assumes all investors have the same risk preferences
C) It ignores market efficiency
D) It cannot handle multiple factors
Answer: B
APT’s reliance on factors allows for:
A) Narrower scope in portfolio construction
B) More precise risk assessment
C) Ignoring diversification benefits
D) Increased complexity in modeling
Answer: D
The APT model assumes that market participants are:
A) Rational
B) Risk-seeking
C) Ignorant of market trends
D) Indifferent to mispriced assets
Answer: A
Which of the following is a factor commonly included in APT models?
A) Company-specific earnings
B) Historical market returns
C) Industry average stock prices
D) Macroeconomic indicators
Answer: D
The APT model is less restrictive than CAPM because it:
A) Requires the estimation of only one factor
B) Allows for multiple factors influencing returns
C) Ignores systematic risk
D) Assumes risk-free investments
Answer: B
True or False: APT assumes that all investors have the same utility function.
A) True
B) False
Answer: B
The APT model helps investors to understand:
A) The behavior of individual investors
B) The relationship between risk and return
C) Short-term market trends
D) Historical dividend payouts
Answer: B
Which of the following statements about APT factors is true?
A) Factors must be unrelated to asset returns
B) Factors must be perfectly correlated
C) Factors must explain asset returns consistently
D) Factors must be company-specific
Answer: C
APT assumes that market participants:
A) Always seek to maximize returns
B) Ignore risk entirely
C) Quickly eliminate arbitrage opportunities
D) Predict all future market movements
Answer: C
The APT model helps in identifying:
A) Historical market performance
B) Mispriced assets
C) Short-term trading opportunities
D) Company-specific risks
Answer: B
Which of the following is a factor that can be included in an APT model?
A) Technical analysis indicators
B) Historical market prices
C) Macroeconomic variables
D) Stock market volume
Answer: C
The APT model assumes that markets are:
A) Inefficient
B) Efficient
C) Risk-free
D) Volatile
Answer: B
True or False: APT can be applied only to equity securities and not to other financial instruments.
A) True
B) False
Answer: B
Which of the following is a step in implementing the APT model?
A) Estimating historical returns only
B) Ignoring factor analysis
C) Calculating alphas for each asset
D) Identifying relevant factors
Answer: D
APT suggests that asset prices:
A) Reflect all available information
B) Are always undervalued
C) Are unpredictable
D) Remain constant over time
Answer: A
The APT model assumes that factors influencing asset returns:
A) Are independent of each other
B) Must be company-specific
C) Are perfectly correlated
D) Must be based on market trends
Answer: A
Which of the following is a limitation of the APT model?
A) It requires a single-factor analysis
B) It assumes market efficiency
C) It cannot handle multiple factors
D) It ignores company-specific risk
Answer: D
APT is based on the assumption that:
A) Market participants do not seek to maximize returns
B) Factors influencing asset returns are unknown
C) Arbitrage opportunities are quickly eliminated
D) Historical data is irrelevant for future returns
Answer: C
The APT model helps investors to:
A) Predict exact future returns
B) Identify mispriced assets
C) Eliminate all market risks
D) Ignore factor analysis
Answer: B
Which of the following statements about APT is true?
A) APT suggests that all investors have identical risk preferences
B) APT requires the estimation of a single factor only
C) APT is based on the assumption of a risk-free market
D) APT helps in identifying arbitrage opportunities
Answer: D