Question 1

For a 10-factor model, the analyst must develop 10

Accepted Answer

A)   zero-factors.
B)   random-error variances.
C)   covariances.
D)   sensitivities.E) B) and C)
F) A) and C)

Question 2

You have a two-factor model to forecast the return for Security A: 4% + l.5(GDP)  - 2(CPI) . You forecast GDP at 4% and CPI at 3% with variances of 6% and 5% respectively. The covariance (GDP, CPI)  is .8 and the variance of the random error is 9%. The variance for Security A would be

Accepted Answer

A)   47.3.
B)   37.7.
C)   52.4.
D)   38.3.E) B) and C)
F) C) and D)

Question 3

In the factor-analytic approach to estimating factor models, factor analysis will identify factors but unfortunately they will be

Accepted Answer

A)   based on the model builder's intuition rather than scientific testing of historical returns and sensitivities
B)   based on the structure of the return data which is statistically unstable
C)   unspecified beforehand as to what economic variables the factors represent
D)   tempered with the judgment of the model builder to account for the static nature of the investment environmentE) B) and C)
F) A) and D)

Question 4

For a one factor model, the slope for Security X is 4, and the slope for Security Y is 5. The factor has a standard deviation of 3%. The covariance between Securities X and Y is

Accepted Answer

A)   90.
B)   180.
C)   120.
D)   60.E) A) and B)
F) B) and C)

Question 5

Random diversification will tend to decrease

Accepted Answer

A)   systematic risk.
B)   the beta of the portfolio.
C)   nonfactor risk.
D)   individual security variance.E) A) and B)
F) All of the above

Question 6

In a factor model, the variable "B" measures the

Accepted Answer

A)   sensitivity to the factor.
B)   riskfree rate.
C)   unique return of the security.
D)   random errorE) None of the above
F) A) and D)

Question 7

The savings and loan industry would probably have a high sensitivity to a factor such as

Accepted Answer

A)   national unemployment rates
B)   real interest rates
C)   exchange rates
D)   utilization levels of fixed assetsE) A) and D)
F) All of the above

Question 8

_____ risk is that part of security's total risk that is related to moves in various common factors.

Accepted Answer

A)   Nonfactor
B)   Market
C)   Factor
D)   MarginE) A) and D)
F) None of the above

Question 9

Which of the following statements is NOT true about one-factor models and diversification?

Accepted Answer

A)   it leads to an averaging of factor risk
B)   for a well-diversified portfolio, factor risk will be insignificant
C)   it can substantially reduce nonfactor risk
D)   for a well-diversified portfolio, nonfactor risk will be insignificantE) All of the above
F) None of the above

Question 10

To calculate the zero-factor from a multiple-factor model developed portfolio, the resulting zero-factor

Accepted Answer

A)   will be 0.
B)   is a weighted average based on the factor covariances.
C)   is a weighted average based on the security proportions.
D)   is not included.E) None of the above
F) A) and D)

Question 11

The one-factor return-generating model assumes the correlation between the random-error term and the factor is

Accepted Answer

A)   1.
B)   0.
C)   -.5.
D)   -1.E) None of the above
F) All of the above

Question 12

In the world of factor models the market model is an example where the factor is the

Accepted Answer

A)   unemployment rate
B)   growth of the money supply
C)   factor utilization rate
D)   market indexE) All of the above
F) A) and C)

Question 13

________ is a measure of the responsiveness of a security's returns to a particular common factor.

Accepted Answer

A)   Factor loading
B)   Regression analysis
C)   Factor risk
D)   Sector factorE) A) and B)
F) A) and C)

Exam 11: Factor Models

In the factor-analytic approach to estimating factor models, factor analysis will identify factors but unfortunately they will be

Correct Answer
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For a 10-factor model, the analyst must develop 10

Correct Answer
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For a one factor model, the slope for Security X is 4, and the slope for Security Y is 5. The factor has a standard deviation of 3%. The covariance between Securities X and Y is

Correct Answer
verified

Which of the following statements is NOT true about one-factor models and diversification?

Correct Answer
verified

Random diversification will tend to decrease

Correct Answer
verified

You have a two-factor model to forecast the return for Security A: 4% + l.5(GDP) - 2(CPI) . You forecast GDP at 4% and CPI at 3% with variances of 6% and 5% respectively. The covariance (GDP, CPI) is .8 and the variance of the random error is 9%. The variance for Security A would be

Correct Answer
verified

________ is a measure of the responsiveness of a security's returns to a particular common factor.

Correct Answer
verified

The one-factor return-generating model assumes the correlation between the random-error term and the factor is

Correct Answer
verified

The savings and loan industry would probably have a high sensitivity to a factor such as

Correct Answer
verified

_____ risk is that part of security's total risk that is related to moves in various common factors.

Correct Answer
verified

To calculate the zero-factor from a multiple-factor model developed portfolio, the resulting zero-factor

Correct Answer
verified

In a factor model, the variable "B" measures the

Correct Answer
verified

In the world of factor models the market model is an example where the factor is the

Correct Answer
verified

Exam 11: Factor Models

In the factor-analytic approach to estimating factor models, factor analysis will identify factors but unfortunately they will be

Correct AnswerverifiedShow Answer

For a 10-factor model, the analyst must develop 10

Correct AnswerverifiedShow Answer

For a one factor model, the slope for Security X is 4, and the slope for Security Y is 5. The factor has a standard deviation of 3%. The covariance between Securities X and Y is

Correct AnswerverifiedShow Answer

Which of the following statements is NOT true about one-factor models and diversification?

Correct AnswerverifiedShow Answer

Random diversification will tend to decrease

Correct AnswerverifiedShow Answer

You have a two-factor model to forecast the return for Security A: 4% + l.5(GDP) - 2(CPI) . You forecast GDP at 4% and CPI at 3% with variances of 6% and 5% respectively. The covariance (GDP, CPI) is .8 and the variance of the random error is 9%. The variance for Security A would be

Correct AnswerverifiedShow Answer

________ is a measure of the responsiveness of a security's returns to a particular common factor.

Correct AnswerverifiedShow Answer

The one-factor return-generating model assumes the correlation between the random-error term and the factor is

Correct AnswerverifiedShow Answer

The savings and loan industry would probably have a high sensitivity to a factor such as

Correct AnswerverifiedShow Answer

_____ risk is that part of security's total risk that is related to moves in various common factors.

Correct AnswerverifiedShow Answer

To calculate the zero-factor from a multiple-factor model developed portfolio, the resulting zero-factor

Correct AnswerverifiedShow Answer

In a factor model, the variable "B" measures the

Correct AnswerverifiedShow Answer

In the world of factor models the market model is an example where the factor is the

Correct AnswerverifiedShow Answer

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