Part I. (Sentence Correction) All of the following statements are false. Please change the incorrect parts to make them true. DO NOT negate the sentence, unless necessary.

1. Both the CAPM and APT assume that one specific factor explains security returns.

2. Both the CAPM and APT assume that investors hold the market portfolio as their choice of risky assets.

3. According to the APT, there is a linear relationship between expected return and unsystematic risk(s).

4. Investors may exploit arbitrage opportunities by buying long fairly-priced assets and selling short underpriced assets.

5. In the APT model, the identity of all the factors is known.

6. The goal of an active portfolio is to track the index as closely as possible.

7. Value stocks would have high price/book.

8. Index funds are depository receipts that give investors a pro rata claim on the capital gains and cash flows of securities held by financial institutions.

9. A benchmark portfolio is an example of active portfolios.

10. The Sharpe measure allows investors to determine the statistical significance of abnormal returns.

11. The Sharpe measure examines the risk premium per unit of systematic risk.

12. The Treynor ratio uses the mean excess return in the numerator divided by the amount of residual risk that the investor incurred in pursuit of those excess returns.

13. Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the Sharpe measure is better for ranking individual managers. However, the Treynor measure is better for evaluating the sole manager of a small fund who is responsible for not fully diversified investments