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1. In a multifactor APT model, the coefficients on the macro factors are often called:

1. (a) systemic risk.
2. (b) firm-specific risk.
3. (c) idiosyncratic risk.
4. (d) factor betas.

2. Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1 portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

1. (a) 9.26%
2. (b) 3%
3. (c) 4%
4. (d) 7.75%

3. The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called

1. (a) arbitrage.
2. (b) capital asset pricing.
3. (c) factoring.
4. (d) fundamental analysis.
5. (e) none of the above.

4. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well- diversified portfolio is approximately

1. (a) 3.6%
2. (b) 6.0%
3. (c) 7.3%
4. (d) 10.1%

5. Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on the factor 1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

1. (a) 2%
2. (b) 3%
3. (c) 4%
4. (d) 7.75%