Question 3. (a) Give the definition of a single-factor model for asset returns. Describe the single-factor model based on the CAPM. What random variable plays the role of the factor in it? (b) Define a K-factor model for asset returns. Define an exact factor model. (c) What is meant by the exposure (sensitivity) of asset i to factor :? How do we define the exposure (sensitivity) of a portfolio a to factor *? (d) For a financial market described by a random vector R = (/6:; ..., Ix) of asset returns. define the notion of an arbitrage opportunity. Formulate the no-arbitrage hypothesis (NA). (e) Formulate the Exact Factor Pricing Theorem. Define what is meant by factor risk premia. (n Is the CAPM an exact factor model? Does the CAPM imply the exact factor pricing? Justify your answers. (g) Outline the main idea of the Ross-Huberman APT. Describe the model of a "large" asset market. What is given in this model? What assumptions on the data of the model are imposed? (h) Formulate and interpret the notion of an asymptotic arbitrage opportunity. (i) Define the vector of factor pricing errors for assets { = 1, 2, .... / and the factor pricing error for the asset market (j) State the Ross-[luberman theorem - the central result of APT. Discuss and interpret the result. What conclusion regarding the averages of the squared factor pricing errors can be derived from the Ross-Huberman theorem