Q1

Which of the following statements is incorrect regarding the Capital Asset Pricing Model (CAPM) or Multi-factor models such as the Fama and French's three factor model or the Arbitrage Pricing Theory (APT)?

Group of answer choices

1.These models are used to forecast the future returns of a market, sector/industry or a specific investment.

2,These models either require that the markets are efficient to start with or that the markets will become efficient.

3.These models can be enhanced to make improved predictions through adjusting the risk factor(s).

4.These models are used to create portfolios with specific level(s) of factor risk for example creating portfolios with lower sensitivity to overall market movements, or portfolios with higher sensitivity to unanticipated change in inflation, or portfolio with lower sensitivity to small capitalised equities.

5.These models can be used to calculate the liquidity needs of an investor with long investment horizon and with low level of willingness to take risk but high level ability to take risk.

Q2

The Capital Asset pricing Model (CAPM) relates the _______________ risk of an investment with the expected return on that investment because______________________________________.

Group of answer choices

1.systematic, because systematic risk can be diversified away

2.systematic ; unsystematic risk can be diversified away.

3.unsystematic; because unsystematic risk can be diversified to a limit.

4.total; because systematic risk can be diversified to a limit

5.total, because unsystematic risk cannot be diversified away

Q3

Multifactor pricing models such as Fama and French's three factor model, or the Arbitrage Pricing Theory are considered ____________________ in predicting expected returns of an investment compared with the Capital Asset pricing Model because ____________________.

Group of answer choices

1.superior; the Capital Asset Pricing Model uses a single factor that is difficult to construct in the real world.

2.inferior ; Multi-factor models have no theoretical framework while CAPM has a sound theoretical framework.

3.similar ; both models are affected by assumptions that are not realistic and cannot be used in the real world.

4.superior ; an increased number of factors are better able to measure the sensitivity of the investment against each factor.

5.superior ; the Capital Asset pricing Model assumes an efficient market