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P1.T1.410. APT and multi-factor models

Nicole Seaman

Director of FRM Operations
Staff member
Concept: These on-line quiz questions are not specifically linked to AIMs, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical AIM-by-AIM question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are well-suited to online simulation.


410.1. While the riskfree rate is 2.0% and the market risk premium is 5.0%, the price of a security which pays a $3.60 dividend and has an expected return of 9.0% is $75.00. This is due to a simple (naive) assumption of constant perpetual dividend discounted by the CAPM-based rate; i.e., $3.60/0.090 = $40.00. If the correlation between the security and the market suddenly doubles, what is the stock's new price?

a. $17.00
b. $22.50
c. $31.75
d. $67.25

410.2. Peter Parker is comparing the single-factor capital asset pricing model (CAPM) to the arbitrage pricing theory (APT) model. Which statement is true?

a. Both CAPM and APT require a mean-variance efficient market portfolio
b. Both CAPM and APT assume normally distributed security returns
c. Both CAPM and APT recognize multiple systemic risk factors
d. Both CAPM and APT predict a security market line (SML)

410.3. About the Fama-French (FF) three-factor model, each of the following is true, EXCEPT which is false?

a. One factor is High Minus Low (HML); i.e., the excess relative return of so-called "value" stocks with a low price-to-book (P/B) ratio
b. One factor is Industrial Production (IP); i.e., the real output in manufacturing, mining, and electric, and gas utilities
c. As a possible type of arbitrage pricing theory (APT) model, Fama-French may contain a firm-specific risk term
d. Fama-French is an empirical model where the firm-specific are meant to be proxies for exposure to extramarket or systemic risks which are not themselves identified

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