Question

1. If you have an investment in a mutual fund, how can you determine the dollar value of your investment?

2. Which of the following are empirical asset pricing models? CAPM, FAMA FRENCH 3. BOTH, NEITHER

3. According to the CAPM, which of the following is true for a stock with a beta of 1.5? Its covariance with the market is greater than the variance of the market. Its expected return will be 50% more than the expected return of the market. Adding it to the market portfolio will reduce the risk of the market portfolio. All of these are true.

4. Which of the following are THEORETICAL asset pricing models? CAPM, FAMA FRENCH 3. BOTH, NEITHER

5. If most stocks go down in value when inflation expectations rise, you would expect the risk premium for inflation expectations to be ________ in a multifactor model.

Answer 1

1.The value of the dollar can be determined by the exchange rates, Treasury notes and foreign currency reserves. Because Exchange rates changes every day because currencies are traded on the foreign exchange market. The dollar also moves in synchronize with the demand for Treasury notes and finally, the dollar is held by foreign governments in their own currency reserves, so dollar value can determine with these three factors.

2.CAPM, FAMA FRENCH both are Asset pricing models not empirical asset pricing models. Empirical asset pricing model means we should go to the data and try to price an existing asset based on the information that we see on the market.

4. CAPM is THEORETICAL asset pricing model. We use CAPM to determine a theoretically appropriate required rate of return of an asset, to make decisions about investments in assets.

5. 5. If most stocks go down in value when inflation expectations rise, you would expect the risk premium for inflation expectations to be high in a multifactor model.