1. Which of the following statements about the Arbitrage Pricing Theory (APT) are correct? Check all that apply.

a) The APT requires fewer assumptions than the Capital Asset Pricing Model (CAPM).

b) The APT allows the required return be a function of two, three, four, or more factors.

c) The APT assumes that all investors hold the market portfolio.

d) The APT is a single-factor model.

2. Emily, an analyst at Fantastique Computers (FC), models the companys stock assuming that the return earned on all stocks depends on only three risk factors: inflation, industrial production, and the market's aggregate degree of risk aversion. In today's economy, the risk-free rate ( ) is 8%, while the return on the market portfolio ( ) is 15%. Any remaining relevant data is given in the following table:

Variable :

The required rate of return on an inflation portfolio, 13%

The required return on an industrial production portfolio, 10%

The required return on a risk-bearing portfolio, 6%

Factor sensitivity to the inflation portfolio, 0.9

Factor sensitivity to the industrial production portfolio, 1.2 Factor sensitivity to the risk-bearing portfolio, 0.7

FantastiqueComputerss beta, 1.1

Using an APT model, Emily calculates that FCs required rate of return is:

a) 13.50%

b) 13.00%

c) 15.70%

d) 5.50%

If Emily used the Capital Asset Pricing Model, she would have calculated that FCs required rate of return is:

a) 15.70%

b) 0.30%

c) 13.50%

d) -7.70%