Arbitrage Flashcards
1
Q
A zero-investment portfolio with a positive alpha could arise if:
The expected return of the portfolio equals zero.
The capital market line is tangent to the opportunity set.
The Law of One Price remains unviolated.
A risk-free arbitrage opportunity exists
A
d
2
Q
According to the theory of arbitrage:
High-beta stocks are consistently overpriced.
Low-beta stocks are consistently overpriced.
Positive alpha investment opportunities will quickly disappear.
Rational investors will pursue arbitrage opportunities consistent with their risk tolerance.
A
C
3
Q
The general arbitrage pricing theory (APT) differs from the single-factor capital asset pricing model (CAPM) because it:
Places more emphasis on market risk.
Minimizes the importance of diversification.
Recognizes multiple unsystematic risk factors.
Recognizes multiple systematic risk factors.
A
d
4
Q
An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of:
A dominance argument.
The mean-variance efficient frontier.
Arbitrage activity.
The capital asset pricing model.
A
c
5
Q
In contrast to the capital asset pricing model, arbitrage pricing theory:
Requires that markets be in equilibrium.
Uses risk premiums based on micro variables.
Specifies the number and identifies specific factors that determine expected returns.
Does not require the restrictive assumptions concerning the market portfolio
A
d
6
Q
A
