1.According to CAPM, the expected rate of return of a portfolio with a beta of 1.0 and an alpha of 0 is:

1. Between rM and rf .

2. The risk-free rate, rf .

3. (rM rf ).

4. The expected return on the market, rM.

2.According to the theory of arbitrage:

1. High-beta stocks are consistently overpriced.

2. Low-beta stocks are consistently overpriced.

3. Positive alpha investment opportunities will quickly disappear.

4. Rational investors will pursue arbitrage opportunities consistent with their risk tolerance.

3.In contrast to the capital asset pricing model, arbitrage pricing theory:

1. Requires that markets be in equilibrium.

2. Uses risk premiums based on micro variables.

3. Specifies the number and identifies specific factors that determine expected returns.

4. Does not require the restrictive assumptions concerning the market portfolio.