CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models
Arbitrage pricing theory (APT) most likely assumes that the expected return of an asset is a linear function of:
APT models expected return as a linear function of the asset's sensitivities (betas) to several systematic risk factors, each multiplied by its risk premium. Total risk is not the driver because unsystematic risk can be diversified away and is not rewarded.
- Athe asset's total standard deviation only.
- Bthe asset's sensitivities to a set of systematic risk factors.Correct
- Cthe asset's dividend yield and its book-to-market ratio only.
Explanation
APT states that expected return equals the risk-free rate plus the sum of factor risk premiums multiplied by the asset's factor sensitivities. Total standard deviation includes unsystematic risk, which is diversifiable and not priced.
Did you get it right without looking?
One question tells you little. A timed set on The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models shows your real accuracy, how long you take and where you lose marks.
More The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models questions
- In the Fama-French three-factor model, the SMB factor is most accurately described as the return on a portfolio of:
- An analyst estimates a stock's beta by regressing the stock's historical returns on the returns of a market index. The beta estimate is most…
- Compared with the CAPM, multifactor models such as the Fama-French model are most likely to:
- A stock has a beta of 0.8 under the CAPM with a risk-free rate of 2.0%. The stock's required return is 8.8%. The expected market return is c…
- A portfolio manager observes that a fund earns a return of 11.0% with a beta of 1.10. The risk-free rate is 3.0% and the market return is 9.…
- In the market model, R_i = α_i + β_i R_m + ε_i, the slope coefficient β_i is most likely estimated as the: