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Investment Management > Chapter 7 APT > Flashcards

Chapter 7 APT Flashcards

1
Q

Three majorassumptions:

A

Capitalmarketsareperfectlycompetitive
Investors alwaysprefermorewealthtolesswealth
withcertainty
The stochasticprocessgeneratingassetreturnscan beexpressedasalinearfunctionofasetofK factorsorindexes

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2
Q

CAPM iscriticisedbecauseof

A

The manyunrealisticassumptions

The difficultiesinselectingaproxyforthemarket portfolioasabenchmark

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3
Q

In contrasttoCAPM,APTdoesn’tassume

A

Normallydistributedsecurityreturns
Quadraticutilityfunction
A mean‐varianceefficientmarketportfolio

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4
Q

λ0

A

Therateofreturnonazero‐systematicrisk

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5
Q

λj

A

Theriskpremiumrelatedtothefirstriskfactor

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6
Q

bij

A

thepricingrelationshipbetweentherisk premiumandtheasset;thatis,how

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7
Q

UnlikeCAPMthatisaone‐factormodel,APTisa

A

multifactorpricingmodel

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8
Q

For risklessarbitrageneedtoassembleaportfoliothat

A

Requiresnonetwealthinvestedinitially
Bears nosystematicorunsystematicrisk
Stillearnsaprofit

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9
Q

The APTandstockmarketanomalies

Small firmeffect

A

Reinganum:ResultsinconsistentwiththeAPT Chen:SupportedtheAPTmodeloverCAPM

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10
Q

The APTandstockmarketanomalies

Januaryanomaly

A

Gultekin andGultekin:APTnotbetterthanCAPM

Burmeister andMcElroy:Effectnotcapturedby model,butstillrejectedCAPMinfavourofAPT

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11
Q

Fama & French

SMB =-0.4

A

smallminusbig isthereturntoaportfolioofsmallcapstocks
lessthereturntoaportfoliooflarge cap stocks
Negative SMB meaning that the fund is made up of large cap stocks

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12
Q

Fama & French

HML =1.6

A

High-minus-low the return to a portfolio of stocks with high ratios of book-to-market value less the return to a portfolio of low book-market-to-market returns. Positive, the fund is weighted towards High value stocks.

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13
Q

Unfortunately,thetheorydoesnotofferguidance

as……

A

tohowmanyfactorsexistorwhattheiridentifiesmightbe

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14
Q

The APTpositsthatexpectedsecurityreturnsare……

A

relatedinalinearfashiontomultiplecommonrisk

factors.

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15
Q

Small firm effect

A

The tendency of small cap stocks to outperform large cap stocks.

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16
Q

Total return =

A

Total return = dividend yield + capital gain yield.

Investment Management (7 decks)

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