Chapter 3

Question 1

What is Arbitrage pricing theory?

Answer 1

A security’s returns can be predicted using the relationship between the security and a number of common risk factors.

Question 2

What is the difference between APT and CAPM

Answer 2

APT is based on the belief that asset prices are determined by more than just one type of market risk.

Question 3

Influences on Security Returns

Answer 3

1) unanticipated inflation
2) changes in the expected level of industrial production
3) changes in the default risk premium on bonds
4) unanticipated changes in the return on long term government bonds over treasury bills

Question 4

What is the Information Ratio?

Answer 4

A risk-adjusted return measure used to evaluate a manager’s relative performance.
i.e. compare a manager’s performance against a selected benchmark