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Chapter 10
Arbitrage Pricing Theory and Multifactor Models of Risk and Return
Multiple Choice Questions
1. ___________ a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. Both CAPM and APT stipulate
D. Neither CAPM nor APT stipulate
E. No pricing model has been found.
2. Consider the multifactor APT with two factors. Stock A has an expected return of 17.6%, a
beta of 1.45 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1
portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if no
arbitrage opportunities exist?
A. 9.26%
B. 3%
C. 4%
D. 7.75%
10-1
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
3. In a multifactor APT model, the coefficients on the macro factors are often called
A. systemic risk.
B. factor sensitivities.
C. idiosyncratic risk.
D. factor betas.
E. factor sensitivities and factor betas.
A. systemic risk.
B. firm-specific risk.
D. factor betas.
A. systemic risk.
D. factor loadings.
10-2
6. Which pricing model provides no guidance concerning the determination of the risk premium
on factor portfolios?
A. The CAPM
B. The multifactor APT
C. Both the CAPM and the multifactor APT
D. Neither the CAPM nor the multifactor APT
E. None of the options is a true statement.
7. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio

that will yield a sure profit.
A. positive
B. negative
C. zero
D. All of the options
E. None of the options
8. The APT was developed in 1976 by
A. Lintner.
B. Modigliani and Miller.
C. Ross.
D. Sharpe.
10-3
9. A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of
the factors and a beta of 0 on any other factor.
A. factor
B. market
C. index
D. factor and market
E. factor, market, and index
10. The exploitation of security mispricing in such a way that risk-free economic profits may be
earned is called
A. arbitrage.
B. capital asset pricing.
C. factoring.
D. fundamental analysis.
11. In developing the APT, Ross assumed that uncertainty in asset returns was a result of
A. a common macroeconomic factor.
B. firm-specific factors.
C. pricing error.
D. a common macroeconomic factor and firm-specific factors.
10-4
12. The ____________ provides an unequivocal statement on the expected return-beta
relationship for all assets, whereas the _____________ implies that this relationship holds for
all but perhaps a small number of securities.
A. APT, CAPM
B. APT, OPM
C. CAPM, APT
D. CAPM, OPM
13. Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%.
Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%.
If you wanted to take advantage of an arbitrage opportunity, you should take a short position
in portfolio __________ and a long position in portfolio _______.
A. A, A
B. A, B
C. B, A
D. B, B
E. A, the riskless asset
14. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%.
Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is
10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short
position in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
10-5
15. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The beta
of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-
diversified portfolio is approximately
A. 3.6%.
B. 6.0%.
C. 7.3%.
D. 10.1%.
16. Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio
is 18%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified
portfolio is approximately
A. 0.80.
B. 1.13.
C. 1.25.
D. 1.56.
17. Consider the single-factor APT. Stocks A and B have expected returns of 15% and 18%,
respectively. The risk-free rate of return is 6%. Stock B has a beta of 1.0. If arbitrage
opportunities are ruled out, stock A has a beta of
A. 0.67.
B. 1.00.
C. 1.30.
D. 1.69.
E. 0.75.
10-6
beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on the factor 1 portfolio
is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage
opportunities exist?
A. 2%
B. 3%
C. 4%
D. 7.75%
19. Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on factor
1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and factor 2 portfolios are
1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A
is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 15.0%
C. 16.5%
D. 23.0%
20. Consider the multifactor APT with two factors. The risk premiums on the factor 1 and factor 2
portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor 1, and a beta of 0.7
on factor 2. The expected return on stock A is 17%. If no arbitrage opportunities exist, the
risk-free rate of return is
A. 6.0%.
B. 6.5%.
C. 6.8%.
D. 7.4%.
10-7
21. Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor and portfolio B has
a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11% and 17%,
respectively. Assume that the risk-free rate is 6% and that arbitrage opportunities exist.
Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short
$200,000 of portfolio A. Your expected profit from this strategy would be
A. -$1,000.
B. $0.
C. $1,000.
D. $2,000.
22. Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The
betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on portfolios A
and B are 19% and 24%, respectively. Assuming no arbitrage opportunities exist, the risk-free
rate of return must be
A. 4.0%.
B. 9.0%.
C. 14.0%.
D. 16.5%.
23. Consider the multifactor APT. The risk premiums on the factor 1 and factor 2 portfolios are
5% and 3%, respectively. The risk-free rate of return is 10%. Stock A has an expected return
of 19% and a beta on factor 1 of 0.8. Stock A has a beta on factor 2 of
A. 1.33.
B. 1.50.
C. 1.67.
D. 2.00.
10-8
24. Consider the single factor APT. Portfolios A and B have expected returns of 14% and 18%,
respectively. The risk-free rate of return is 7%. Portfolio A has a beta of 0.7. If arbitrage
opportunities are ruled out, portfolio B must have a beta of
A. 0.45.
B. 1.00.
C. 1.10.
D. 1.22.
25. There are three stocks, A, B, and C. You can either invest in these stocks or short sell them.
There are three possible states of nature for economic growth in the upcoming year (each
equally likely to occur); economic growth may be strong, moderate, or weak. The returns for
the upcoming year on stocks A, B, and C for each of these states of nature are given below:
If you invested in an equally weighted portfolio of stocks A and B, your portfolio return would
be ___________ if economic growth were moderate.
A. 3.0%
B. 14.5%
C. 15.5%
D. 16.0%
10-9
If you invested in an equally weighted portfolio of stocks A and C, your portfolio return would
be ____________ if economic growth was strong.
A. 17.0%
B. 22.5%
C. 30.0%
D. 30.5%
10-10
If you invested in an equally weighted portfolio of stocks B and C, your portfolio return would
be _____________ if economic growth was weak.
A. -2.5%
B. 0.5%
C. 3.0%
D. 11.0%
10-11
If you wanted to take advantage of a risk-free arbitrage opportunity, you should take a short
position in _________ and a long position in an equally weighted portfolio of _______.
A. A, B and C
B. B, A and C
C. C, A and B
D. A and B, C
10-12
29. Consider the multifactor APT. There are two independent economic factors, F1 and F2. The
risk-free rate of return is 6%. The following information is available about two well-diversified
portfolios:
Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio should
be
A. 3%.
B. 4%.
C. 5%.
D. 6%.
risk-free rate of return is 6%. The following information is available about two well-diversified
portfolios:
Assuming no arbitrage opportunities exist, the risk premium on the factor F2 portfolio should
be
A. 3%.
B. 4%.
C. 5%.
D. 6%.
10-13
31. A zero-investment portfolio with a positive expected return arises when
A. an investor has downside risk only.
B. the law of prices is not violated.
C. the opportunity set is not tangent to the capital allocation line.
D. a risk-free arbitrage opportunity exists.
32. An investor will take as large a position as possible when an equilibrium price relationship is
violated. This is an example of
A. a dominance argument.
B. the mean-variance efficiency frontier.
C. a risk-free arbitrage.
D. the capital asset pricing model.
33. The APT differs from the CAPM because the APT
A. places more emphasis on market risk.
B. minimizes the importance of diversification.
C. recognizes multiple unsystematic risk factors.
D. recognizes multiple systematic risk factors.
10-14
34. The feature of the APT that offers the greatest potential advantage over the CAPM is the
A. use of several factors instead of a single market index to explain the risk-return
relationship.
B. identification of anticipated changes in production, inflation, and term structure as key

factors in explaining the risk-return relationship.
C. superior measurement of the risk-free rate of return over historical time periods.
D. variability of coefficients of sensitivity to the APT factors for a given asset over time.
35. In terms of the risk/return relationship in the APT,
A. only factor risk commands a risk premium in market equilibrium.
B. only systematic risk is related to expected returns.
C. only nonsystematic risk is related to expected returns.
D. only factor risk commands a risk premium in market equilibrium and only systematic risk is
related to expected returns.
E. only factor risk commands a risk premium in market equilibrium and only nonsystematic
risk is related to expected returns.
36. The following factors might affect stock returns
A. the business cycle.
B. interest rate fluctuations.
C. inflation rates.
10-15
37. Advantage(s) of the APT is(are)
A. that the model provides specific guidance concerning the determination of the risk
premiums on the factor portfolios.
B. that the model does not require a specific benchmark market portfolio.
C. that risk need not be considered.
D. that the model provides specific guidance concerning the determination of the risk
premiums on the factor portfolios and that the model does not require a specific
benchmark market portfolio.
E. that the model does not require a specific benchmark market portfolio and that risk need
not be considered.
38. Portfolio A has expected return of 10% and standard deviation of 19%. Portfolio B has
expected return of 12% and standard deviation of 17%. Rational investors will
A. borrow at the risk-free rate and buy A.
B. sell A short and buy B.
C. sell B short and buy A.
D. borrow at the risk-free rate and buy B.
E. lend at the risk-free rate and buy B.
10-16
39. An important difference between CAPM and APT is
A. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition.
B. CAPM assumes many small changes are required to bring the market back to equilibrium;
APT assumes a few large changes are required to bring the market back to equilibrium.
C. implications for prices derived from CAPM arguments are stronger than prices derived
from APT arguments.
D. All of the options are true.
E. Both CAPM depends on risk-return dominance; APT depends on a no arbitrage condition

and CAPM assumes many small changes are required to bring the market back to
equilibrium; APT assumes a few large changes are required to bring the market back to
equilibrium.
40. A professional who searches for mispriced securities in specific areas such as merger-target
stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in
A. pure arbitrage.
B. risk arbitrage.
C. option arbitrage.
D. equilibrium arbitrage.
41. In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger
its nonsystematic risk approaches
A. one.
B. infinity.
C. zero.
D. negative one.
10-17
42. A well-diversified portfolio is defined as
A. one that is diversified over a large enough number of securities that the nonsystematic
variance is essentially zero.
B. one that contains securities from at least three different industry sectors.
C. a portfolio whose factor beta equals 1.0.
D. a portfolio that is equally weighted.
43. The APT requires a benchmark portfolio
A. that is equal to the true market portfolio.
B. that contains all securities in proportion to their market values.
C. that need not be well-diversified.
D. that is well-diversified and lies on the SML.
E. that is unobservable.
10-18
44. Imposing the no-arbitrage condition on a single-factor security market implies which of the
following statements?
I) The expected return-beta relationship is maintained for all but a small number of well-
diversified portfolios.
II) The expected return-beta relationship is maintained for all well-diversified portfolios.
III) The expected return-beta relationship is maintained for all but a small number of
individual securities.
IV) The expected return-beta relationship is maintained for all individual securities.
A. I and III
B. I and IV
C. II and III
D. II and IV
E. Only I is correct.
45. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the
risk premium on the first factor portfolio is 4% and the risk premium on the second factor
portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor,
what is its expected return?
A. 7.0%
B. 8.0%
C. 9.2%
D. 13.0%
E. 13.2%
10-19
46. The term "arbitrage" refers to
A. buying low and selling high.
B. short selling high and buying low.
C. earning risk-free economic profits.
D. negotiating for favorable brokerage fees.
E. hedging your portfolio through the use of options.
47. To take advantage of an arbitrage opportunity, an investor would
I) construct a zero investment portfolio that will yield a sure profit.

II) construct a zero beta investment portfolio that will yield a sure profit.
III) make simultaneous trades in two markets without any net investment.
IV) short sell the asset in the low-priced market and buy it in the high-priced market.
A. I and IV
B. I and III
C. II and III
D. I, III, and IV
E. II, III, and IV
48. The factor F in the APT model represents
A. firm-specific risk.
B. the sensitivity of the firm to that factor.
C. a factor that affects all security returns.
D. the deviation from its expected value of a factor that affects all security returns.
E. a random amount of return attributable to firm events.
10-20
49. In the APT model, what is the nonsystematic standard deviation of an equally weighted
portfolio that has an average value of σ(ei) equal to 25% and 50 securities?
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 14.59%
A. 12.5%
B. 625%
C. 4.47%
D. 3.54%
E. 14.59%
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 3.16%
10-21
A. 1.14%
B. 625%
C. 0.5%
D. 3.54%
E. 3.16%
53. Which of the following is true about the security market line (SML) derived from the APT?
A. The SML has a downward slope.
B. The SML for the APT shows expected return in relation to portfolio standard deviation.
C. The SML for the APT has an intercept equal to the expected return on the market
portfolio.
D. The benchmark portfolio for the SML may be any well-diversified portfolio.
E. The SML is not relevant for the APT.
54. Which of the following is false about the security market line (SML) derived from the APT?
portfolio.
E. The SML has a downward slope, shows expected return in relation to portfolio standard
deviation, and has an intercept equal to the expected return on the market portfolio.
10-22
55. If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected
excess return must be
A. inversely proportional to the risk-free rate.
B. inversely proportional to its standard deviation.
C. proportional to its weight in the market portfolio.
D. proportional to its standard deviation.
E. proportional to its beta coefficient.
56. Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2. The portfolios
have expected returns of 15% and 6%, respectively. Based on this information, what would be
the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor
and 0.50 on the second factor? The risk-free rate is 3%.
A. 15.2%
B. 14.1%
C. 13.3%
D. 10.7%
E. 8.4%
10-23
57. Which of the following is(are) true regarding the APT?
I) The security market line does not apply to the APT.

II) More than one factor can be important in determining returns.
III) Almost all individual securities satisfy the APT relationship.
IV) It doesn't rely on the market portfolio that contains all assets.
A. II, III, and IV
B. II and IV
C. II and III
D. I, II, and IV
E. I, II, III, and IV
58. In a factor model, the return on a stock in a particular period will be related to
A. factor risk.
B. nonfactor risk.
C. standard deviation of returns.
D. factor risk and nonfactor risk.
E. None of the options is true.
59. Which of the following factors did Chen, Roll, and Ross not include in their multifactor
model?
A. Change in industrial production
B. Change in expected inflation
C. Change in unanticipated inflation
D. Excess return of long-term government bonds over T-bills
E. All of the factors are included in the Chen, Roll, and Ross multifactor model.
10-24
60. Which of the following factors did Chen, Roll, and Ross include in their multifactor model?
A. Change in industrial waste
D. Change in expected inflation and unanticipated inflation
E. All of the factors were included in their model.
61. Which of the following factors were used by Fama and French in their multifactor model?
A. Return on the market index
B. Excess return of small stocks over large stocks
C. Excess return of high book-to-market stocks over low book-to-market stocks
D. All of the factors were included in their model.
E. None of the factors were included in their model.
A. 0.67.
B. 0.93.
C. 1.30.
D. 1.69.
10-25
A. 1.58.
B. 1.13.
C. 1.25.
D. 0.76.
64. Black argues that past risk premiums on firm-characteristic variables, such as those
described by Fama and French, are problematic because
A. they may result from data snooping.
B. they are sources of systematic risk.
C. they can be explained by security characteristic lines.
D. they are more appropriate for a single-factor model.
E. they are macroeconomic factors.
65. Multifactor models seek to improve the performance of the single-index model by
A. modeling the systematic component of firm returns in greater detail.
B. incorporating firm-specific components into the pricing model.
C. allowing for multiple economic factors to have differential effects.
D. All of the options.
10-26
66. Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe
assets' returns by
A. expanding beyond one factor to represent sources of systematic risk.
B. using variables that are easier to forecast ex ante.
C. calculating beta coefficients by an alternative method.
D. using only stocks with relatively stable returns.
E. ignoring firm-specific risk.
67. Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on factor
1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the factor 1,
factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of return is 3%. The
expected return on portfolio A is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 13.4%
C. 16.5%
D. 23.0%
6% and 4%, respectively. The risk-free rate of return is 4%. Stock A has an expected return of
16% and a beta on factor 1 of 1.3. Stock A has a beta on factor 2 of
A. 1.33.
B. 1.05.
C. 1.67.
D. 2.00.
10-27
69. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 5%, the
risk premium on the first factor portfolio is 4% and the risk premium on the second factor
portfolio is 6%. If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor,
what is its expected return?
A. 7.0%
B. 8.0%
C. 18.2%
D. 13.0%
E. 13.2%
in portfolio __________ and a long position in portfolio _______.
A. A, A
B. A, B
C. B, A
D. B, B
10-28
71. Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of 12%.
in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
A. 3.6%.
B. 6.0%.
C. 7.3%.
D. 14.1%.
A. 23.1%.
B. 6.0%.
C. 7.3%.
D. 14.1%.
10-29
A. 0.80.
B. 1.13.
C. 1.25.
D. 1.57.
Short Answer Questions
75. Discuss the advantages of arbitrage pricing theory (APT) over the capital asset pricing model
(CAPM) relative to diversified portfolios.
10-30
76. Discuss the advantages of the multifactor APT over the single factor APT and the CAPM.
What is one shortcoming of the multifactor APT and how does this shortcoming compare to
CAPM implications?
77. Discuss arbitrage opportunities in the context of violations of the law of one price.
10-31
78. Discuss the similarities and the differences between the CAPM and the APT with regard to
the following factors: capital market equilibrium, assumptions about risk aversion, risk-return
dominance, and the number of investors required to restore equilibrium.
79. Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and
an expected return of 11%. The risk-free rate is 6%. Explain the arbitrage opportunity that
exists; explain how an investor can take advantage of it. Give specific details about how to
form the portfolio, what to buy and what to sell.
10-32
80. Name three variables that Chen, Roll, and Ross used to measure the impact of
macroeconomic factors on security returns. Briefly explain the reasoning behind their model.
10-33
Chapter 10 Arbitrage Pricing Theory and Multifactor Models of Risk
and Return Answer Key
Multiple Choice Questions
1. ___________ a relationship between expected return and risk.
A. APT stipulates
B. CAPM stipulates
C. Both CAPM and APT stipulate
D. Neither CAPM nor APT stipulate
E. No pricing model has been found.
Both models attempt to explain asset pricing based on risk/return relationships.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT and CAPM
10-34
beta of 1.45 on factor 1, and a beta of .86 on factor 2. The risk premium on the factor 1
portfolio is 3.2%. The risk-free rate of return is 5%. What is the risk-premium on factor 2 if
no arbitrage opportunities exist?
A. 9.26%
B. 3%
C. 4%
D. 7.75%
17.6% = 1.45(3.2%) + .86x + 5%; x = 9.26.
AACSB: Analytic
Blooms: Apply
Difficulty: Challenge
Topic: APT
A. systemic risk.
B. factor sensitivities.
D. factor betas.
E. factor sensitivities and factor betas.
The coefficients are called factor betas, factor sensitivities, or factor loadings.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
10-35
A. systemic risk.
D. factor betas.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
A. systemic risk.
D. factor loadings.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
10-36
6. Which pricing model provides no guidance concerning the determination of the risk
premium on factor portfolios?
A. The CAPM
B. The multifactor APT
C. Both the CAPM and the multifactor APT
D. Neither the CAPM nor the multifactor APT
E. None of the options is a true statement.
The multifactor APT provides no guidance as to the determination of the risk premium on
the various factors. The CAPM assumes that the excess market return over the risk-free
rate is the market premium in the single factor CAPM.
AACSB: Analytic
Blooms: Remember
Difficulty: Intermediate
Topic: APT and CAPM
7. An arbitrage opportunity exists if an investor can construct a __________ investment

portfolio that will yield a sure profit.
A. positive
B. negative
C. zero
If the investor can construct a portfolio without the use of the investor's own funds and
the portfolio yields a positive profit, arbitrage opportunities exist.
AACSB: Analytic
Blooms: Remember
10-37
Difficulty: Basic
Topic: APT
8. The APT was developed in 1976 by
A. Lintner.
B. Modigliani and Miller.
C. Ross.
D. Sharpe.
Ross developed this model in 1976.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
9. A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one

of the factors and a beta of 0 on any other factor.
A. factor
B. market
C. index
D. factor and market
E. factor, market, and index
A factor model portfolio has a beta of 1 one factor, with zero betas on other factors.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
10-38
10. The exploitation of security mispricing in such a way that risk-free economic profits may
be earned is called
A. arbitrage.
B. capital asset pricing.
C. factoring.
D. fundamental analysis.
Arbitrage is earning of positive profits with a zero (risk-free) investment.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
11. In developing the APT, Ross assumed that uncertainty in asset returns was a result of
A. a common macroeconomic factor.
B. firm-specific factors.
C. pricing error.
D. a common macroeconomic factor and firm-specific factors.
Total risk (uncertainty) is assumed to be composed of both macroeconomic and firm-

specific factors.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-39
12. The ____________ provides an unequivocal statement on the expected return-beta
relationship for all assets, whereas the _____________ implies that this relationship holds
for all but perhaps a small number of securities.
A. APT, CAPM
B. APT, OPM
C. CAPM, APT
D. CAPM, OPM
The CAPM is an asset-pricing model based on the risk/return relationship of all assets.
The APT implies that this relationship holds for all well-diversified portfolios, and for all
but perhaps a few individual securities.
AACSB: Analytic
Blooms: Remember
Topic: APT and CAPM
10-40
position in portfolio __________ and a long position in portfolio _______.
A. A, A
B. A, B
C. B, A
D. B, B
A: 16% = 1.0F + 6%; F = 10%; B: 12% = 0.8F + 6%: F = 7.5%; thus, short B and take a long
position in A.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-41
14. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of
13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of
return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take
a short position in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
A: 13% = 10% + 0.2F; F = 15%; B: 15% = 10% + 0.4F; F = 12.5%; therefore, short B and
take a long position in A.
AACSB: Analytic
Blooms: Apply
Topic: APT
15. Consider the one-factor APT. The variance of returns on the factor portfolio is 6%. The
beta of a well-diversified portfolio on the factor is 1.1. The variance of returns on the well-
A. 3.6%.
B. 6.0%.
C. 7.3%.
D. 10.1%.
s2P = (1.1)2(6%) = 7.26%.
AACSB: Analytic
Blooms: Apply
10-42
Topic: APT
16. Consider the one-factor APT. The standard deviation of returns on a well-diversified
portfolio is 18%. The standard deviation on the factor portfolio is 16%. The beta of the
well-diversified portfolio is approximately
A. 0.80.
B. 1.13.
C. 1.25.
D. 1.56.
(18%)2 = (16%)2 b2; b = 1.125.
AACSB: Analytic
Blooms: Apply
Topic: APT
A. 0.67.
B. 1.00.
C. 1.30.
D. 1.69.
E. 0.75.
A: 18% = 6% + bF; B: 8% = 6% + 1.0F; F = 12%; thus, beta of A = 9/12 = 0.75.
AACSB: Analytic
Blooms: Apply
10-43
Topic: APT
beta of 1.4 on factor 1 and a beta of .8 on factor 2. The risk premium on the factor 1
portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if
no arbitrage opportunities exist?
A. 2%
B. 3%
C. 4%
D. 7.75%
16.4% = 1.4(3%) + .8x + 6%; x = 7.75.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-44
19. Consider the multifactor model APT with two factors. Portfolio A has a beta of 0.75 on
factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and factor 2
portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected
return on portfolio A is __________ if no arbitrage opportunities exist.
A. 13.5%
B. 15.0%
C. 16.5%
D. 23.0%
7% + 0.75(1%) + 1.25(7%) = 16.5%.
AACSB: Analytic
Blooms: Apply
Topic: APT
20. Consider the multifactor APT with two factors. The risk premiums on the factor 1 and
factor 2 portfolios are 5% and 6%, respectively. Stock A has a beta of 1.2 on factor 1, and a
beta of 0.7 on factor 2. The expected return on stock A is 17%. If no arbitrage opportunities
exist, the risk-free rate of return is
A. 6.0%.
B. 6.5%.
C. 6.8%.
D. 7.4%.
17% = x% + 1.2(5%) + 0.7(6%); x = 6.8%.
AACSB: Analytic
Blooms: Apply
10-45
Topic: APT
21. Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor and portfolio B
has a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11% and
17%, respectively. Assume that the risk-free rate is 6% and that arbitrage opportunities
exist. Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and
sold short $200,000 of portfolio A. Your expected profit from this strategy would be
A. -$1,000.
B. $0.
C. $1,000.
D. $2,000.
$100,000(0.06) = $6,000 (risk-free position); $100,000(0.17) = $17,000 (portfolio B); -

$200,000(0.11) = -$22,000 (short position, portfolio A); 1,000 profit.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-46
22. Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The
betas of portfolios A and B are 1.0 and 1.5, respectively. The expected returns on
portfolios A and B are 19% and 24%, respectively. Assuming no arbitrage opportunities
exist, the risk-free rate of return must be
A. 4.0%.
B. 9.0%.
C. 14.0%.
D. 16.5%.
A: 19% = rf + 1(F); B: 24% = rf + 1.5(F); 5% = .5(F); F = 10%; 24% = rf + 1.5(10); rf = 9%.
AACSB: Analytic
Blooms: Apply
Topic: APT
5% and 3%, respectively. The risk-free rate of return is 10%. Stock A has an expected
return of 19% and a beta on factor 1 of 0.8. Stock A has a beta on factor 2 of
A. 1.33.
B. 1.50.
C. 1.67.
D. 2.00.
19% = 10% + 5%(0.8) + 3%(x); x = 1.67.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-47
24. Consider the single factor APT. Portfolios A and B have expected returns of 14% and 18%,
respectively. The risk-free rate of return is 7%. Portfolio A has a beta of 0.7. If arbitrage
opportunities are ruled out, portfolio B must have a beta of
A. 0.45.
B. 1.00.
C. 1.10.
D. 1.22.
A: 14% = 7% + 0.7F; F = 10; B: 18% = 7% + 10b; b = 1.10.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-48
25. There are three stocks, A, B, and C. You can either invest in these stocks or short sell
them. There are three possible states of nature for economic growth in the upcoming year
(each equally likely to occur); economic growth may be strong, moderate, or weak. The
returns for the upcoming year on stocks A, B, and C for each of these states of nature are
given below:
If you invested in an equally weighted portfolio of stocks A and B, your portfolio return
would be ___________ if economic growth were moderate.
A. 3.0%
B. 14.5%
C. 15.5%
D. 16.0%
E(Rp) = 0.5(17%) + 0.5(15%) = 16%.
AACSB: Analytic
Blooms: Apply
Difficulty: Basic
Topic: APT
10-49
given below:
If you invested in an equally weighted portfolio of stocks A and C, your portfolio return
would be ____________ if economic growth was strong.
A. 17.0%
B. 22.5%
C. 30.0%
D. 30.5%
0.5(39%) + 0.5(6%) = 22.5%.
AACSB: Analytic
Blooms: Apply
Difficulty: Basic
Topic: APT
10-50
given below:
If you invested in an equally weighted portfolio of stocks B and C, your portfolio return
would be _____________ if economic growth was weak.
A. -2.5%
B. 0.5%
C. 3.0%
D. 11.0%
0.5(0%) + 0.5(22%) = 11%.
AACSB: Analytic
Blooms: Apply
Difficulty: Basic
Topic: APT
10-51
given below:
If you wanted to take advantage of a risk-free arbitrage opportunity, you should take a
short position in _________ and a long position in an equally weighted portfolio of _______.
A. A, B and C
B. B, A and C
C. C, A and B
D. A and B, C
E(RA) = (39% + 17% - 5%)/3 = 17%; E(RB) = (30% + 15% + 0%)/3 = 15%; E(RC) = (22% +
14% + 6%)/3 = 14%; E(RP) = -0.5(14%) + 0.5[(17% + 15%)/2]; -7.0% + 8.0% = 1.0%.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-52
risk-free rate of return is 6%. The following information is available about two well-
diversified portfolios:
Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio
should be
A. 3%.
B. 4%.
C. 5%.
D. 6%.
2A: 38% = 12% + 2.0(RP1) + 4.0(RP2); B: 12% = 6% + 2.0(RP1) + 0.0(RP2); 26% = 6% +

4.0(RP2); RP2 = 5; A: 19% = 6% + RP1 + 2.0(5); RP1 = 3%.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-53
risk-free rate of return is 6%. The following information is available about two well-
diversified portfolios:
Assuming no arbitrage opportunities exist, the risk premium on the factor F2 portfolio
should be
A. 3%.
B. 4%.
C. 5%.
D. 6%.
2A: 38% = 12% + 2.0(RP1) + 4.0(RP2); B: 12% = 6% + 2.0(RP1) + 0.0(RP2); 26% = 6% +

4.0(RP2); RP2 = 5; A: 19% = 6% + RP1 + 2.0(5); RP1 = 3%.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-54
31. A zero-investment portfolio with a positive expected return arises when
A. an investor has downside risk only.
B. the law of prices is not violated.
C. the opportunity set is not tangent to the capital allocation line.
D. a risk-free arbitrage opportunity exists.
When an investor can create a zero-investment portfolio (by using none of the investor's
own funds) with a possibility of a positive profit, a risk-free arbitrage opportunity exists.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
32. An investor will take as large a position as possible when an equilibrium price relationship
is violated. This is an example of
A. a dominance argument.
B. the mean-variance efficiency frontier.
C. a risk-free arbitrage.
D. the capital asset pricing model.
When the equilibrium price is violated, the investor will buy the lower priced asset and
simultaneously place an order to sell the higher priced asset. Such transactions result in
risk-free arbitrage. The larger the positions, the greater the risk-free arbitrage profits.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-55
33. The APT differs from the CAPM because the APT
A. places more emphasis on market risk.
B. minimizes the importance of diversification.
C. recognizes multiple unsystematic risk factors.
D. recognizes multiple systematic risk factors.
The CAPM assumes that market returns represent systematic risk. The APT recognizes
that other macroeconomic factors may be systematic risk factors.
AACSB: Analytic
Blooms: Remember
Topic: APT and CAPM
34. The feature of the APT that offers the greatest potential advantage over the CAPM is the
A. use of several factors instead of a single market index to explain the risk-return
relationship.
B. identification of anticipated changes in production, inflation, and term structure as key

factors in explaining the risk-return relationship.
C. superior measurement of the risk-free rate of return over historical time periods.
D. variability of coefficients of sensitivity to the APT factors for a given asset over time.
The advantage of the APT is the use of multiple factors, rather than a single market index,
to explain the risk-return relationship. However, APT does not identify the specific factors.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
10-56
35. In terms of the risk/return relationship in the APT,
A. only factor risk commands a risk premium in market equilibrium.
B. only systematic risk is related to expected returns.
C. only nonsystematic risk is related to expected returns.
D. only factor risk commands a risk premium in market equilibrium and only systematic
risk is related to expected returns.
E. only factor risk commands a risk premium in market equilibrium and only
nonsystematic risk is related to expected returns.
Nonfactor risk may be diversified away; thus, only factor risk commands a risk premium in
market equilibrium. Nonsystematic risk across firms cancels out in well-diversified
portfolios; thus, only systematic risk is related to expected returns.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
36. The following factors might affect stock returns
A. the business cycle.
B. interest rate fluctuations.
C. inflation rates.
All of the options are likely to affect stock returns.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
10-57
Topic: APT
37. Advantage(s) of the APT is(are)
A. that the model provides specific guidance concerning the determination of the risk
premiums on the factor portfolios.
B. that the model does not require a specific benchmark market portfolio.
C. that risk need not be considered.
D. that the model provides specific guidance concerning the determination of the risk
premiums on the factor portfolios and that the model does not require a specific
benchmark market portfolio.
E. that the model does not require a specific benchmark market portfolio and that risk
need not be considered.
The APT provides no guidance concerning the determination of the risk premiums on the
factor portfolios. Risk must be considered in both the CAPM and APT. A major advantage
of APT over the CAPM is that a specific benchmark market portfolio is not required.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT and CAPM
10-58
38. Portfolio A has expected return of 10% and standard deviation of 19%. Portfolio B has
expected return of 12% and standard deviation of 17%. Rational investors will
A. borrow at the risk-free rate and buy A.
B. sell A short and buy B.
C. sell B short and buy A.
D. borrow at the risk-free rate and buy B.
E. lend at the risk-free rate and buy B.
Rational investors will arbitrage by selling A and buying B.
AACSB: Analytic
Blooms: Understand
Difficulty: Basic
Topic: APT
10-59
39. An important difference between CAPM and APT is
A. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition.
B. CAPM assumes many small changes are required to bring the market back to
equilibrium; APT assumes a few large changes are required to bring the market back to
equilibrium.
C. implications for prices derived from CAPM arguments are stronger than prices derived
from APT arguments.
D. All of the options are true.
E. Both CAPM depends on risk-return dominance; APT depends on a no arbitrage

condition and CAPM assumes many small changes are required to bring the market
back to equilibrium; APT assumes a few large changes are required to bring the market
back to equilibrium.
Under the risk-return dominance argument of CAPM, when an equilibrium price is violated
many investors will make small portfolio changes, depending on their risk tolerance, until
equilibrium is restored. Under the no-arbitrage argument of APT, each investor will take as
large a position as possible so only a few investors must act to restore equilibrium.
Implications derived from APT are much stronger than those derived from CAPM.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-60
40. A professional who searches for mispriced securities in specific areas such as merger-
target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is
engaged in
A. pure arbitrage.
B. risk arbitrage.
C. option arbitrage.
D. equilibrium arbitrage.
Risk arbitrage involves searching for mispricings based on speculative information that
may or may not materialize.
AACSB: Analytic
Blooms: Remember
Topic: APT
41. In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes
larger its nonsystematic risk approaches
A. one.
B. infinity.
C. zero.
D. negative one.
As the number of securities, n, increases, the nonsystematic risk of a well-diversified

portfolio approaches zero.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
10-61
42. A well-diversified portfolio is defined as
A. one that is diversified over a large enough number of securities that the nonsystematic
variance is essentially zero.
B. one that contains securities from at least three different industry sectors.
C. a portfolio whose factor beta equals 1.0.
D. a portfolio that is equally weighted.
A well-diversified portfolio is one that contains a large number of securities, each having a
small (but not necessarily equal) weight, so that nonsystematic variance is negligible.
AACSB: Analytic
Blooms: Remember
Topic: APT
43. The APT requires a benchmark portfolio
A. that is equal to the true market portfolio.
B. that contains all securities in proportion to their market values.
C. that need not be well-diversified.
D. that is well-diversified and lies on the SML.
E. that is unobservable.
Any well-diversified portfolio lying on the SML can serve as the benchmark portfolio for
the APT. The true (and unobservable) market portfolio is only a requirement for the CAPM.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-62
44. Imposing the no-arbitrage condition on a single-factor security market implies which of
the following statements?
I) The expected return-beta relationship is maintained for all but a small number of well-
diversified portfolios.
II) The expected return-beta relationship is maintained for all well-diversified portfolios.
III) The expected return-beta relationship is maintained for all but a small number of
individual securities.
IV) The expected return-beta relationship is maintained for all individual securities.
A. I and III
B. I and IV
C. II and III
D. II and IV
E. Only I is correct.
The expected return-beta relationship must hold for all well-diversified portfolios and for
all but a few individual securities; otherwise arbitrage opportunities will be available.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-63
45. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%,
the risk premium on the first factor portfolio is 4% and the risk premium on the second
factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the
second factor, what is its expected return?
A. 7.0%
B. 8.0%
C. 9.2%
D. 13.0%
E. 13.2%
.06 + 1.2 (.04) + .8 (.03) = .132.
AACSB: Analytic
Blooms: Apply
Topic: APT
46. The term "arbitrage" refers to
A. buying low and selling high.
B. short selling high and buying low.
C. earning risk-free economic profits.
D. negotiating for favorable brokerage fees.
E. hedging your portfolio through the use of options.
Arbitrage is exploiting security mispricings by the simultaneous purchase and sale to gain
economic profits without taking any risk. A capital market in equilibrium rules out arbitrage
opportunities.
AACSB: Analytic
Blooms: Remember
10-64
Difficulty: Basic
Topic: APT
47. To take advantage of an arbitrage opportunity, an investor would
I) construct a zero investment portfolio that will yield a sure profit.

II) construct a zero beta investment portfolio that will yield a sure profit.
III) make simultaneous trades in two markets without any net investment.
IV) short sell the asset in the low-priced market and buy it in the high-priced market.
A. I and IV
B. I and III
C. II and III
D. I, III, and IV
E. II, III, and IV
Only I and III are correct. II is incorrect because the beta of the portfolio does not need to
be zero. IV is incorrect because the opposite is true.
AACSB: Analytic
Blooms: Understand
Topic: APT
10-65
48. The factor F in the APT model represents
A. firm-specific risk.
B. the sensitivity of the firm to that factor.
C. a factor that affects all security returns.
D. the deviation from its expected value of a factor that affects all security returns.
E. a random amount of return attributable to firm events.
F measures the unanticipated portion of a factor that is common to all security returns.
AACSB: Analytic
Blooms: Remember
Topic: APT
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 14.59%
AACSB: Analytic
Blooms: Apply
Topic: APT
10-66
A. 12.5%
B. 625%
C. 4.47%
D. 3.54%
E. 14.59%
AACSB: Analytic
Blooms: Apply
Topic: APT
A. 12.5%
B. 625%
C. 0.5%
D. 3.54%
E. 3.16%
AACSB: Analytic
Blooms: Apply
Topic: APT
10-67
A. 1.14%
B. 625%
C. 0.5%
D. 3.54%
E. 3.16%
AACSB: Analytic
Blooms: Apply
Topic: APT
53. Which of the following is true about the security market line (SML) derived from the APT?
portfolio.
E. The SML is not relevant for the APT.
The benchmark portfolio does not need to be the (unobservable) market portfolio under
the APT, but can be any well-diversified portfolio. The intercept still equals the risk-free
rate.
AACSB: Analytic
Blooms: Remember
10-68
Topic: APT
54. Which of the following is false about the security market line (SML) derived from the
APT?
portfolio.
E. The SML has a downward slope, shows expected return in relation to portfolio
standard deviation, and has an intercept equal to the expected return on the market
portfolio.
The benchmark portfolio does not need to be the (unobservable) market portfolio under
the APT, but can be any well-diversified portfolio. The intercept still equals the risk-free
rate.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-69
55. If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected
excess return must be
A. inversely proportional to the risk-free rate.
B. inversely proportional to its standard deviation.
C. proportional to its weight in the market portfolio.
D. proportional to its standard deviation.
E. proportional to its beta coefficient.
For each well-diversified portfolio (P and Q, for example), it must be true that [ E(rp) -
rf]/βp = [E(rQ) - rf]/βQ.
AACSB: Analytic
Blooms: Remember
Topic: APT
56. Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2. The
portfolios have expected returns of 15% and 6%, respectively. Based on this information,
what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80
on the first factor and 0.50 on the second factor? The risk-free rate is 3%.
A. 15.2%
B. 14.1%
C. 13.3%
D. 10.7%
E. 8.4%
E(RA) = 3 + 0.8 × (15 - 3) + 0.5 × (6 - 3) = 14.1.
AACSB: Analytic
Blooms: Apply
10-70
Topic: APT
57. Which of the following is(are) true regarding the APT?
I) The security market line does not apply to the APT.

II) More than one factor can be important in determining returns.
III) Almost all individual securities satisfy the APT relationship.
IV) It doesn't rely on the market portfolio that contains all assets.
A. II, III, and IV
B. II and IV
C. II and III
D. I, II, and IV
E. I, II, III, and IV
All except the first item are true. There is a security market line associated with the APT.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-71
58. In a factor model, the return on a stock in a particular period will be related to
A. factor risk.
B. nonfactor risk.
C. standard deviation of returns.
D. factor risk and nonfactor risk.
Factor models explain firm returns based on both factor risk and nonfactor risk.
AACSB: Analytic
Blooms: Remember
Topic: APT
59. Which of the following factors did Chen, Roll, and Ross not include in their multifactor
model?
A. Change in industrial production
D. Excess return of long-term government bonds over T-bills
E. All of the factors are included in the Chen, Roll, and Ross multifactor model.
Chen, Roll, and Ross included the four listed factors as well as the excess return of long-
term corporate bonds over long-term government bonds in their model.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-72
60. Which of the following factors did Chen, Roll, and Ross include in their multifactor model?
A. Change in industrial waste
D. Change in expected inflation and unanticipated inflation
E. All of the factors were included in their model.
Chen, Roll, and Ross included the change in expected inflation and the change in
unanticipated inflation as well as the excess return of long-term corporate bonds over
long-term government bonds in their model.
AACSB: Analytic
Blooms: Remember
Topic: APT
61. Which of the following factors were used by Fama and French in their multifactor model?
A. Return on the market index
B. Excess return of small stocks over large stocks
C. Excess return of high book-to-market stocks over low book-to-market stocks
D. All of the factors were included in their model.
E. None of the factors were included in their model.
Fama and French included all three of the factors listed.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-73
A. 0.67.
B. 0.93.
C. 1.30.
D. 1.69.
A: 12% = 5% + bF; B: 14% = 5% + 1.2F; F = 7.5%; Thus, beta of A = 7/7.5 = 0.93.
AACSB: Analytic
Blooms: Apply
Topic: APT
A. 1.58.
B. 1.13.
C. 1.25.
D. 0.76.
(19%)2 = (12%)2b2; b = 1.58.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-74
64. Black argues that past risk premiums on firm-characteristic variables, such as those
described by Fama and French, are problematic because
A. they may result from data snooping.
B. they are sources of systematic risk.
C. they can be explained by security characteristic lines.
D. they are more appropriate for a single-factor model.
E. they are macroeconomic factors.
Black argues that past risk premiums on firm-characteristic variables, such as those
described by Fama and French, are problematic because they may result from data
snooping.
AACSB: Analytic
Blooms: Remember
Topic: APT
10-75
65. Multifactor models seek to improve the performance of the single-index model by
A. modeling the systematic component of firm returns in greater detail.
B. incorporating firm-specific components into the pricing model.
C. allowing for multiple economic factors to have differential effects.
D. All of the options.
Multifactor models seek to improve the performance of the single-index model by

modeling the systematic component of firm returns in greater detail, incorporating firm-
specific components into the pricing model, and allowing for multiple economic factors to
have differential effects.
AACSB: Analytic
Blooms: Remember
Difficulty: Basic
Topic: APT
66. Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better
describe assets' returns by
A. expanding beyond one factor to represent sources of systematic risk.
B. using variables that are easier to forecast ex ante.
C. calculating beta coefficients by an alternative method.
D. using only stocks with relatively stable returns.
E. ignoring firm-specific risk.
The study used five different factors to explain security returns, allowing for several
sources of risk to affect the returns.
AACSB: Analytic
Blooms: Remember
10-76
Topic: APT
67. Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on
factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the
factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of
return is 3%. The expected return on portfolio A is __________ if no arbitrage opportunities
exist.
A. 13.5%
B. 13.4%
C. 16.5%
D. 23.0%
3% + 0.8(3%) + 1.1(5%) + 1.25(2%) = 13.4%.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-77
6% and 4%, respectively. The risk-free rate of return is 4%. Stock A has an expected return
of 16% and a beta on factor 1 of 1.3. Stock A has a beta on factor 2 of
A. 1.33.
B. 1.05.
C. 1.67.
D. 2.00.
16% = 4% + 6%(1.3) + 4%(x); x = 1.05.
AACSB: Analytic
Blooms: Apply
Topic: APT
69. Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 5%,
the risk premium on the first factor portfolio is 4% and the risk premium on the second
factor portfolio is 6%. If portfolio A has a beta of 0.6 on the first factor and 1.8 on the
second factor, what is its expected return?
A. 7.0%
B. 8.0%
C. 18.2%
D. 13.0%
E. 13.2%
.05 + .6 (.04) + 1.8 (.06) = .182.
AACSB: Analytic
Blooms: Apply
10-78
Topic: APT
position in portfolio __________ and a long position in portfolio _______.
A. A, A
B. A, B
C. B, A
D. B, B
A: 22% = 2.0F + 4%; F = 9%; B: 17% = 1.5F + 4%: F = 8.67%; thus, short B and take a long
position in A.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-79
71. Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of
12%. Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of
return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take
a short position in portfolio _________ and a long position in portfolio _________.
A. A, A
B. A, B
C. B, A
D. B, B
A: 12% = 5% + 0.5F; F = 14%; B: 13% = 5% + 0.4F; F = 20%; therefore, short A and take a
long position in B.
AACSB: Analytic
Blooms: Apply
Topic: APT
beta of a well-diversified portfolio on the factor is 1.25. The variance of returns on the
A. 3.6%.
B. 6.0%.
C. 7.3%.
D. 14.1%.
s2P = (1.25)2(9%) = 14.06%.
AACSB: Analytic
Blooms: Apply
10-80
Topic: APT
beta of a well-diversified portfolio on the factor is 1.45. The variance of returns on the
A. 23.1%.
B. 6.0%.
C. 7.3%.
D. 14.1%.
s2P = (1.45)2(11%) = 23.13%.
AACSB: Analytic
Blooms: Apply
Topic: APT
A. 0.80.
B. 1.13.
C. 1.25.
D. 1.57.
(22%)2 = (14%)2b2; b = 1.57.
AACSB: Analytic
Blooms: Apply
Topic: APT
10-81
Short Answer Questions
75. Discuss the advantages of arbitrage pricing theory (APT) over the capital asset pricing
model (CAPM) relative to diversified portfolios.
The APT does not require that the benchmark portfolio in the SML relationship be the true
market portfolio. Any well-diversified portfolio lying on the SML may serve as a benchmark
portfolio. Thus, the APT has more flexibility than the CAPM, as problems associated with
an unobservable market portfolio are not a concern with APT. In addition, the APT
provides further justification for the use of the index model for practical implementation of
the SML relationship. That is, if the index portfolio is not a precise proxy for the true
market portfolio, which is a cause of considerable concern in the context of the CAPM, if
an index portfolio is sufficiently diversified, the SML relationship holds, according to APT.
Feedback: This question is designed to determine if the student understands the basic
advantages of APT over the CAPM.
AACSB: Reflective Thinking

Blooms: Understand
Topic: APT and CAPM
10-82
76. Discuss the advantages of the multifactor APT over the single factor APT and the CAPM.
What is one shortcoming of the multifactor APT and how does this shortcoming compare
to CAPM implications?
The single factor APT and the CAPM assume that there is only one systematic risk factor
affecting stock returns. However, several factors may affect stock returns. Some of these
factors are: business cycles, interest rate fluctuations, inflation rates, oil prices, etc. A
multifactor model can accommodate these multiple sources of risk.
One shortcoming of the multifactor APT is that the model provides no guidance concerning
the factors or risk premiums on the factor portfolios. The CAPM implies that the risk
premium on the market is determined by the market's variance and the average degree of
risk aversion across investors.
advantages of the multifactor APT over the single-factor APT and CAPM.

Blooms: Understand
Topic: APT and CAPM
10-83
77. Discuss arbitrage opportunities in the context of violations of the law of one price.
The law of one price is violated when an asset is trading at different prices in two markets.
If the price differential exceeds the transactions costs, a simultaneous trade in the two
markets can produce a sure profit with a zero investment. That is, the investor can sell
short the asset in the high-priced market and buy the asset in the low-priced market. The
investor has been able to assume these positions with a zero investment (using the
proceeds of the short transaction to finance the long position). However, it should be
remembered that individual investors do not have access to the proceeds of a short
transaction until the position has been covered.
concept of arbitrage.

Blooms: Understand
Difficulty: Basic
Topic: APT
10-84
78. Discuss the similarities and the differences between the CAPM and the APT with regard
to the following factors: capital market equilibrium, assumptions about risk aversion, risk-
return dominance, and the number of investors required to restore equilibrium.
Both the CAPM and the APT are market equilibrium models, which examine the factors
that affect securities' prices. In equilibrium, there are no overpriced or underpriced
securities. In both models, mispriced securities can be identified and purchased or sold as
appropriate to earn excess profits.
The CAPM is based on the idea that there are large numbers of investors who are focused
on risk-return dominance. Under the CAPM, when a mispricing occurs, many individual
investors make small changes in their portfolios, guided by their degrees of risk aversion.
The aggregate effect of their actions brings the market back into equilibrium. Under the
APT, each investor wants an infinite arbitrage position in the mispriced asset. Therefore, it
would not take many investors to identify the arbitrage opportunity and act to bring the
market back to equilibrium.
Feedback: The student can compare the two models by focusing on the specific items.

Blooms: Understand
Topic: APT and CAPM
10-85
79. Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75
and an expected return of 11%. The risk-free rate is 6%. Explain the arbitrage opportunity
that exists; explain how an investor can take advantage of it. Give specific details about
how to form the portfolio, what to buy and what to sell.
An arbitrage opportunity exists because it is possible to form a portfolio of security A and

the risk-free asset that has a beta of 0.75 and a different expected return than security B.
The investor can accomplish this by choosing .75 as the weight in A and .25 in the risk-
free asset. This portfolio would have E(rp) = 0.75(12%) + 0.25(6%) = 10.5%, which is less
than B's 11% expected return. The investor should buy B and finance the purchase by
short selling A and borrowing at the risk-free asset.
Feedback: The student can apply arbitrage principles.

Blooms: Apply
Topic: APT
10-86
80. Name three variables that Chen, Roll, and Ross used to measure the impact of
macroeconomic factors on security returns. Briefly explain the reasoning behind their
model.
The factors they considered were IP (the percentage change in industrial production), EI
(the percentage change in expected inflation), UI (the percentage change in unanticipated
inflation), CG (excess return of long-term corporate bonds over long-term government
bonds), and GB (excess return of long-term government bonds over T-bills). The rational
for their model is that many different economic factors can combine to affect securities'
returns. Also, by including factors that are related to the business cycle, the estimation of
beta coefficients should be improved. Each beta will represent only the impact of the
corresponding variable on returns.
Feedback: The student has some flexibility in remembering which variables were used in
the study. A general understanding of macroeconomic variables will be helpful in
answering the question. The question provides an opportunity to measure the student's
understanding of the types of risk that are relevant and how they can be explicitly
considered in the model.

Blooms: Understand
Topic: APT
10-87
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Innocencia
This ebook is for the use of anyone anywhere in the United States and
most other parts of the world at no cost and with almost no restrictions
whatsoever. You may copy it, give it away or re-use it under the terms of
the Project Gutenberg License included with this ebook or online at
www.gutenberg.org. If you are not located in the United States, you will
have to check the laws of the country where you are located before using
this eBook.
Title: Innocencia
Author: Visconde de Alfredo d'Escragnolle Taunay Taunay
Illustrator: Alfredo Norfini
Release date: July 29, 2022 [eBook #68635]
Language: Portuguese
Original publication: Brazil: N. Falcone, 1906
Credits: Laura Natal Rodrigues (Images generously made available by

Hathi Trust Digital Library.)
*** START OF THE PROJECT GUTENBERG EBOOK INNOCENCIA ***

VISCONDE DE TAUNAY
INNOCENCIA
Decimo Primeiro Milheiro
1906
N. FALCONE & Cia.—editores
65—Rua de S. Bento—65
S. PAULO
INDICE
CAPITULO
I. O sertão e o sertanejo
II. O viajante
III. O doutor
IV. A casa do mineiro
V. Aviso previo
VI. Innocencia
VII. O naturalista
VIII. Os hospedes da meia-noite
IX. O medicamento
X. A carta de recommendação
XI. O almoço
XII. A apresentação
XIII. Desconfianças
XIV. Realidade
XV. Historias de Meyer
XVI. O empalamado
XVII. O morphetico
XVIII. Idyllio
XIX. Calculos e esperanças
XX. Novas historias de Meyer
XXI. Papilio Innocentia
XXII. Meyer parte
XXIII. A ultima entrevista
XXIV. A villa de Sant'Anna
XXV. A viagem
XXVI. Recepção cordial
XXVII. Scenas intimas
XXVIII. Em casa de Cesario
XXIX. Resistencia de corça
XXX. Desenlace
EPILOGO. Reapparece Meyer
A
José Antonio de Azevedo Castro
AMIGO DE INFANCIA
Azevedo Castro,
Se nos antigos tempos da Grecia, me fora possivel erigir custoso
templo, dedicava-o á Amizade para no frontispicio gravar o teu querido
nome.
Daquelle vivo sentimento permitte-me hoje, amigo, dentro do circulo
de fracos e limitados meios, qualquer demonstração.
Não é em valioso monumento que vou inscrever a tua lembrança;
simplesmente na primeira pagina de uma narrativa campestre e
despretenciosa, de um livro singelo e sem futuro.
Aceita-o como um dos mais espontaneos movimentos da minha
alma, que n'esta declaração sincera julga assentar direitos a completo
indulto.
A. D'ESCRAGNOLLE—
Taunay.
Rio de Janeiro, 8 de Julho de 1872.
PREFACIO
Em pouco mais de dous annos esgotou-se a sexta edição de

Innocencia e a setima; os dous mil e quinhentos exemplares impressos
em meiados de 1903 espalharam-se com relativa rapidez attendendo-se
ao facto de que o romance appareceu em 1873 e que a procura de livros
no Brazil infelizmente ainda não é das maiores.
Nos ultimos dous annos foi Innocencia muitas vezes publicada em
folhetim por periodicos brazileiros e portuguezes; em volume porem só
temos conhecimento de duas edições novas; uma allemã, da traducção
de Karl Schuler, illustrada por Max Tilke e impressão da casa D. Dreyer
& Comp. de Berlim e outra da versão japoneza de Kawana Kwandzo
pela revista Fastos Japonezes.
Actualmente conta pois a formosa novella oito traducções enfeixadas
em volume das quaes, duas francezas, duas allemãs, uma ingleza, uma
hespanhola, uma italiana e uma japoneza; existindo alem dessas,
publicadas na imprensa uma em polaco e outra em dinamarquez.
É provavel que brevemente appareça mais uma edição ingleza de
nova versão dedicada ao Conselheiro José Antonio de Azevedo Castro,
padrinho do livro, a quem o Visconde de Taunay dedicava a mais
extremada amizade e affeição retribuida da mais forte maneira.
Soffreram os primeiros capitulos da presente edição ligeiros retoques,
á vista de originaes deixados pelo autor e que infelizmente não
estiveram ao alcance do revisor da sexta.
O nome dos acreditados livreiros editores Srs. N. Falcone & Comp. é
um cunho da elegancia da factura do livro.
S. Paulo, Dezembro de 1905.
... Innocencia. Este livro terá longa vida, do mesmo modo que se
póde, ainda hoje, viajar a Escossia com as novellas de Walter Scott por
guias.
FRANCISCO OCTAVIANO.
INNOCENCIA
CAPITULO I
O SERTÃO E O SERTANEJO
Todos vós bem sentis a acção secreta
Da natureza em seu governo eterno;
E de infimas camadas subterraneas
Da vida o indicio á superficie emerge.
GOETHE.—Fausto, 2.ª parte.
Então com passo tranquillo mettia-me eu por algum recanto da
floresta, algum lugar deserto, onde nada me indicasse a mão do
homem, me denunciasse a servidão e o dominio; asylo em que pudesse
crêr ter primeiro entrado, onde nenhum importuno viesse interpôr-se
entre mim e a natureza.
J. J. ROUSSEAU.—O encanto da solidão.
Corta extensa e quasi despovoada zona da parte sul-oriental da

vastissima provincia de Matto-Grosso a estrada que da villa de Santa
Anna do Paranahyba vae ter ao sitio abandonado de Camapoan. Desde
aquella povoação, assente proximo ao vertice do angulo em que
confinam os territorios de S. Paulo, Minas-Geraes, Goyaz e Matto-
Grosso até ao rio Sucuriú, affluente do magestoso Paraná, isto é, no
desenvolvimento de muitas dezenas de leguas, anda-se
commodamente, de habitação em habitação, mais ou menos chegadas
umas ás outras; raream, porém, depois as casas, mais e mais, e
caminha-se largas horas, dias inteiros sem se ver morada nem gente até
ao retiro[1] de João Pereira, guarda avançada daquellas solidões,
homem chão e hospitaleiro, que acolhe com carinho o viajante desses
alongados páramos, offerece-lhe momentaneo agazalho e o provê da
matolotagem precisa para alcançar os campos de Miranda e Pequiry, ou
da Vaccaria e Nioac, no Baixo Paraguay.
Alli começa o sertão chamado bruto[2].
Pousos succedem a pousos, e nenhum tecto habitado ou em ruinas,
nenhuma palhoça ou tapera dá abrigo ao caminhante contra a frialdade
das noites, contra o temporal que ameaça, ou a chuva que está cahindo.
Por toda a parte, a calma da campina não arroteada; por toda a parte, a
vegetação virgem, como quando ahi surgio pela vez primeira.
A estrada que atravessa essas regiões incultas desenrola-se á
maneira de alvejante faixa, aberta que é na areia, elemento dominante
na composição de todo aquelle solo, fertilisado aliás por um sem numero
de limpidos e borbulhantes regatos, ribeirões e rios, cujos contingentes
são outros tantos tributarios do claro e fundo Paraná ou, na
contravertente do correntoso Paraguay.
Essa areia solta e um tanto grossa tem côr uniforme que reverbera
com intensidade os raios do sol, quando nella batem de chapa. Em
alguns pontos é tão fofa e movediça que os animaes das tropas viajeiras
arquejam de cansaço, ao vencerem aquelle terreno incerto, que lhes
foge de sob os cascos e onde se enterram até meia canella.
Frequentes são tambem os desvios, que da estrada partem de um e
outro lado e proporcionam, na matta adjacente, trilha mais firme, por ser
menos pisada.
Se parece sempre igual o aspecto do caminho, em compensação mui
variadas se mostram as paizagens em torno.
Ora é a perspectiva dos cerrados[3], não desses cerrados de arbustos
rachiticos, enfezados e retorcidos de S. Paulo e Minas-Geraes, mas de
garbosas e elevadas arvores que, se bem não tomem todas o corpo de
que são capazes á beira das aguas correntes ou regados pela lympha
dos corregos, comtudo ensombram com folhuda rama o terreno que lhes
fica em derredor e mostram na casca lisa a força da seiva que os
alimenta; ora são campos a perder de vista, cobertos de macega alta e
alourada, ou de viridente e mimosa gramma, toda salpicada de
sylvestres flores; ora successões de luxuriantes capões[4], tão regulares
e symetricos em sua disposição que surprehendem e embellezam os
olhos; ora, emfim charnecas meio apaúladas, meio seccas, onde nasce
o altivo bority e o gravatá entrança o seu tapume espinhoso.
Nesses campos, tão diversos pelo matiz das cores, o capim crescido
e resiccado pelo ardor do sol transforma-se em vicejante tapete de relva,
quando lavra o incendio que algum tropeiro, por acaso ou mero
desenfado, atêa com uma faulha do seu isqueiro.
Minando á surda na touceira queda a vivida scentelha. Corra d'ahi a
instantes qualquer aragem, por debil que seja, e levanta-se a lingua de
fogo esguia e tremula, como que a contemplar medrosa e vacilante os
espaços immensos que se alongam diante della. Soprem então as auras
com mais força, e de mil pontos a um tempo rebentam sofregas
labaredas que se enroscam umas nas outras, de subito se dividem,
deslisam, lambem vastas superficies, despedem ao céu rolos de
negrejante fumo e voam, roncando pelos matagaes de tabocas e
taquaras, até esbarrarem de encontro a alguma margem de rio que não
possam transpor, caso não as tanja para além o vento, ajudando com
valente folego a larga obra de destruição.
Acalmado aquelle impeto por falta de alimento, fica tudo debaixo de
espessa camada de cinzas. O fogo, detido em pontos, aqui, alli, a
consumir com mais lentidão algum estorvo, vai aos poucos morrendo
até se extinguir de todo, deixando como signal da avassalladora
passagem o alvacento lençol, que lhe foi seguindo os velozes passos.
Atravez da atmosphera ennublada mal póde então coar a luz do sol.
A incineração é completa, o calor intenso, e nos ares revoltos volitam
palhinhas carboretadas, detritos, argueiros e granulos de carvão que
redemoinham, sobem, descem e se emmaranham nos sorvedouros e
adelgaçadas trombas, caprichosamente formadas pelas aragens, ao
embaterem umas de encontro ás outras.
Por toda a parte melancolia; de todos os lados tetricas perspectivas.
É cahir, porém, dahi a dias copiosa chuva, e parece que uma varinha
de fada andou por aquelles sombrios recantos a traçar ás pressas
jardins encantados e nunca vistos. Entra tudo n'um trabalho intimo de
espantosa actividade. Transborda a vida. Não há ponto em que não
brote o capim, em que não desabrochem rebentões com o olhar sofrego
de quem espreita azada occasião para buscar a liberdade,
despedaçando as prisões de penosa clausura.
Áquella instantanea resurreição nada, nada póde pôr peas.
Basta uma noite, para que formosa alfombra verde, verde-claro,
verde-gaio, assetinado, cubra todas as tristezas de há pouco.
Aprimoram-se depois os esforços; rompem as flores do campo que
desabotoam ás caricias, da brisa as delicadas corollas e lhe entregam
as primicias dos seus candidos perfumes.
Se falham essas chuvas vivificadoras, então por muitos e muitos
mezes, ahi ficam aquellas campinas, devastadas pelo fogo,
lugubremente illuminadas por avermelhados clarões sem uma sombra,
um sorriso, uma esperança de vida, com todas as suas opulencias e
verdejantes pimpolhos occultos, como que raladas de dor e mudo
desespero por não poderem ostentar as riquezas e galas encerradas no
ubertoso seio.
Nessas afflictas paragens, não mais se ouve o piar da esquiva perdiz,
tão frequente antes do incendio. Só de vez em quando echoa o
arrastado guincho do algum gavião, que paira lá em cima ou bordeja ao
chegar-se á terra afim de agarrar um ou outro reptil chamuscado do fogo
que lavrou.
Rompe tambem o silencio o grasnido do caracará, que aos pulos
procura insectos e cobrinhas ou, junto ao solo, segue o vôo dos urubús,
cujos negrejantes bandos, guiados pelo fino olfacto, buscam a carniça
putrefacta.
É o caracará commensal do urubú. De parceria se atira, quando
urgido pela fome, á rez morta e, intromettido como é, a custo de alguma
bicada do pouco amavel conviva, belisca do seu lado no immundo
repasto.
Se passa o caracará á vista do gavião, precipita-se este sobre elle
com vôo firme, dá-lhe com a ponta da aza, atordoa-o, atormenta-o só
pelo gosto de lhe mostrar a incontestada superioridade.
Nada, com effeito, o mette em brios.
Pelo contrario, mal levou dous ou tres encontrões do miúdo, mas
audaz adversario, baixa prudente á terra e põe-se ahi desageitadamente
aos saltos, apresentando o adunco bico ao antagonista, que com a
extremidade das azas levanta pó e cinza, tão de perto as arrasta ao
chão.
Afinal, de cansado, deixa o gavião o folguedo, segurando de um bote
a serpesinha, que, em custoso rasto, procurava algum buraco onde
fosse, mais a salvo, pensar as fundas queimaduras.
II
Taes são os campos que as chuvas não vêm regar.

Com que gosto demanda então o sertanejo os capões que lá de bem
longe se avistam nas encostas das collinas e baixuras, ao redor de
alguma nascente orlada de pindahybas e boritys?!
Com que alegria não saúda os formosos coqueiraes, nuncios, da
lympha que lhe hade estancar a sede e banhar o afogueado rosto?!
Enfileiram-se ás vezes as palmeiras com singular regularidade na
altura e conformação; mas não raro amontoam-se em compactos
massiços, dos quaes se segregam algumas mais e mais, a acompanhar
com as raizes qualquer tenue fio d’agua, que collea falto de forças e
quasi a sumir-se na ávida areia.
Desde longe dão na vista esses capões.
É a principio um ponto negro, depois uma cupola de verdura, afinal,
mais de perto, uma ilha de luxuriante rama, oásis para os membros
lassos do viajante exhausto de fadiga, para os seus olhos encandeados
e sua garganta abrasada.
Então com sofreguidão natural acolhe-se elle ao sombreado retiro,
onde prestes desarreia a cavalgadura, á qual dá liberdade para ir pastar,
entregando-se sem demora ao somno reparador que lhe trará novo
alento para proseguir na cansativa jornada.
Ao homem do sertão afiguram-se taes momentos incomparaveis,
acima de tudo quanto possa idear a imaginação no mais vasto circulo de
ambições.
Satisfeita a sede que lhe seccara as fauces, e comidas umas
colheres de farinha de mandioca ou de milho, adoçada com rapadura,
estira-se a fio comprido sobre os arreios desdobrados e contempla
descuidoso o firmamento azul, as nuvens que se espacejam nos ares, a
folhagem lustrosa e os troncos brancos das pindahybas, a copa dos ipês
e as palmas dos boritys a ciciar a modo de harpas eólias, musicas sem
conta com o perpassar da brisa.
Como são bellas aquellas palmeiras!
O estipite liso, pardacento, sem manchas mais que pontuadas
estrias, sustenta denso feixe de peciolos longos e canulados, em que
assentão flabellas abertas como um leque, cujas pontas se acurvam
flexiveis e tremulantes.
Na base e em torno da coma, pendem, amparados por largas
spathas, densos cachos de cocos tão duros, que a casca luzidia
revestida de escamas rhomboidaes e de um amarello alaranjado desafia
por algum tempo o ferreo bico das araras.
Tambem com que vigor trabalham as barulhentas aves antes de
conseguir a appetecida e saborosa amendoa! Em grupos juntam-se
ellas, umas vermelhas como chispas soltas de intensa labareda, outras
versicolores, outras pelo contrario de todo azues, de maior viso e que,
por parecerem negras em distancia, tem o nome de araraúnas.[5] Alli
ficam alcandoradas, balouçando-se gravemente e atirando, de espaço a
espaço, ás immensidades das dilatadas campinas notas estridentes,
quando não seja um clamor sem fim, ao quererem muitas disputar o
mesmo cacho. Quasi sempre, porem estão a namorar-se aos pares,
pousadas uma bem encostadinha á outra.
Vê tudo aquillo o sertanejo com olhar carregado de somno. Cahem-
lhe pesadas as palpebras; bem se lembra de que por alli podem rastejar
venenosas alimarias, mas é fatalista; confia no destino e, sem mais
preoccupação, adormece com serenidade.
Correm as horas: vem o sol descambando; refresca a brisa, e sopra,
rijo o vento. Não ciciam mais os boritys; gemem, e convulsamente
agitam as flabelladas palmas.
É a tarde que chega.
Desperta então o viajante; esfrega os olhos; distende
preguiçosamente os braços; boceja; bebe uma pouca d'agua; fica uns
instantes sentado, a olhar de um lado para o outro e corre afinal a
buscar o animal, que de prompto ensilha e cavalga.
Uma vez montado, lá vai elle a passo ou a trote, bem disposto de
corpo e de espirito, por aquelles caminhos além, em demanda de
qualquer pouso onde pernoite.
Quanta melancolia baixa á terra com o cahir da tarde!
Parece que a solidão alarga os seus limites para se tornar
acabrunhadora. Ennegrece o solo; formam os matagaes sombrios
massiços, e ao longe se desdobra tenue véu de um roxo uniforme e
desmaiado, no qual, como linhas a meio apagadas, resaltam os troncos
de uma ou outra palmeira mais alterosa.
É a hora, em que se aperta de inexplicavel receio o coração.
Qualquer ruido nos causa sobresalto; ora o grito afflicto da zabelê nas
mattas, ora as plangentes notas do bacuráu a cruzar os ares. Frequente
é tambem amiudarem-se os pios angustiados de alguma perdiz,
chamando ao ninho o companheiro extraviado, antes que a escuridão de
todo lhe impossibilite a volta.
Quem viaja attento ás impressões intimas, estremece mau grado seu
ao ouvir n'esse momento de saudades o tanger de um sino muito, muito
ao longe ou o silvar distante de uma locomotiva impossivel. São insectos
occultos na macega que trazem essa illusão, por tal modo viva e perfeita
que a imaginação, embora desabusada e prevenida, ergue o vôo e lá vai
por estes mundos fóra a doudejar e a crear mil fantasias.
III
Espalham-se, por fim, as sombras da noite.

O sertanejo que de nada cuidou, que não ouviu as harmonias da
tarde, nem reparou nos esplendores do céu, que não viu a tristeza a
pairar sobre a terra, que de nada se arreceia, consubstanciado como
está com a solidão, pára, relanceia os olhos ao derredor de si e, se no
lugar presente alguma aguada, por má que seja, apeia-se, desensilha o
cavallo e, reunindo logo uns gravetos bem seccos, tira fogo do isqueiro,
mais por distracção do que por necessidade.
Sente-se deveras feliz. Nada lhe perturba a paz do espirito ou o bem-
estar do corpo. Nem sequer monologa, como qualquer homem
acostumado a conversar.
Raros são os seus pensamentos: ou rememora as leguas que andou,
ou computa as que tem que vencer para chegar ao termino da viagem.
No dia seguinte, quando aos clarões da aurora acorda toda aquella
esplendida natureza, recomeça elle a caminhar, como na vespera, como
sempre.
Nada lhe parece mudado no firmamento: as nuvens de si para si são
as mesmas. Dá-lhe o sol, quando muito, os pontos cardeaes, e a terra
só lhe prende a attenção, quando algum signal mais particular póde
servir-lhe de marco milliario na estrada que vai trilhando.
—Bom! exclama em voz alta e alegre ao avistar algum madeiro
agigantado ou uma disposição especial de terras, lá está a péuva
grande... Cheguei ao Barranco Alto. Até ao pouso de Jacaré ha quatro
leguas bem puxadas.
E, olhando para o sol, conclue:
—D'aqui a tres horas estou batendo fogo.
Occasiões ha em que o sertanejo dá para assoviar. Cantar, é raro;
ainda assim, á surdina; mais uma voz intima, um rumorejar comsigo, do
que notas sahidas do robusto peito. Responder ao pio das perdizes ou
ao chamado agoniado da esquiva jaó, é o seu divertimento em dias de
bom humor.
É-lhe indifferente o urro da onça. Só por demais repara nas muitas
pegadas, que em todos os sentidos ficam marcadas na arêa da estrada.
—Que bichão! murmura elle contemplando um rasto mais fortemente
impresso no solo; com um bom onceiro[6] não se me dava de acuar este
diabo e metter-lhe uma chumbada no focinho.
O legitimo sertanejo, explorador dos desertos, não tem, em geral,
familia. Em quanto moço, seu fim unico é devassar terras, pisar campos
onde ninguem antes puzera pé, vadear rios desconhecidos, despontar
cabeceiras[7] e furar mattas, que descobridor algum até então haja
varado.
Cresce-lhe o orgulho na razão da extensão e importancia das viagens
emprehendidas; e seu maior gosto cifra-se em enumerar as correntes
caudaes que transpoz, os ribeirões que baptisou, as serras que
trasmontou e os pantanaes que afoutamente cortou, quando não levou
dias e dias a rodeal-os com rara paciencia.
Cada anno que finda traz-lhe mais um valioso conhecimento e
accrescenta uma pedra ao monumento da sua innocente vaidade.
—Ninguem póde commigo, exclama elle emphaticamente. Nos
campos da Vaccaria, no sertão do Mimoso e nos pantános[8] do Pequiry,
sou rei.
E esta presumpção de realeza infunde-lhe certo modo de falar e de
gesticular magestatico em sua singela manifestação.
A certeza que tem de que nunca poderá perder-se na vastidão, como
que o liberta da obsessão do desconhecido, o exalta e lhe dá foros de
infallibilidade.
Se estende o braço, aponta com segurança no espaço e declara
peremptoriamente:
—N'este rumo daqui a 20 leguas, fica o espigão mestre de uma serra
braba, depois um rio grosso; dalli a cinco leguas outro matto sujo que vai
findar n'um brejal. Se vassuncê frechar direitinho assim umas duas
horas, topa com o pouso do Tatú, no caminho que vai a Cuyabá.
O que faz n'uma direcção, com a mesma, imperturbavel serenidade e
firmeza indica em qualquer outra.
A unica interrupção que aos outros consente, quando conta os
innumeros descobrimentos, é a da admiração. Á minima suspeita de
duvida ou pouco caso, incendem-se-lhe de colera as faces e no gesto
denuncia indignação.
—Vassuncê não credita! protesta então com calor. Pois ensilhe o seu
bicho e caminhe como eu lhe disser. Mas assumpte[9] bem, que no
terceiro dia de viagem ficará decidido quem é cavoqueiro[10] e
embromador[11]. Uma cousa é mapiar[12] á toa, outra andar com tento
por estes mundos de Christo.
Quando o sertanejo vai ficando velho, quando sente os membros
cansados e entorpecidos, os olhos já ennevoados pela idade, os braços
frouxos para manejar a machadinha que lhe dá o substancial palmito ou
o saboroso mel de abelhas, procura então quem o queira para esposo,
alguma viúva ou parenta chegada, forma casa e escola, e prepara os
filhos e enteados para a vida aventureira e livre que tantos gozos lhe
dera outr'ora.
Esses discipulos, aguçada a curiosidade com as repetidas e
animadas descripções das grandes scenas da natureza, n'um bello dia
desertam da casa paterna, espalham-se por ahi além, e uns nos confins
do Paraná, outros nas brenhas de S. Paulo, nas planuras de Goyaz ou
nas bocainas de Matto-Grosso, por toda a parte emfim onde haja
deserto vão pôr em activa pratica tudo quanto souberam tão bem ouvir,
relembrando as façanhas do seu respeitado progenitor e mestre.
[1]Chama-se em Matto-Grosso retiro o local em que os criadores de

gado reunem as rezes para as contar, marcar e dar-lhes sal.
[2]Sem moradores.
[3]Florestas de arbustos de 3 a 4 pés de altura mais ou menos, mui
chegados uns aos outros.
[4]Excellente palavra brazileira derivada da lingua geral caá-púan
(matto isolado).
[5]Araras pretas.
[6]Cão caçador de onças.
[7]Despontar cabeceiras é rodear as nascentes do rios, procurando
sempre terreno enxuto.
[8]No interior pronuncia-se a palavra grave e não esdruxula, mais
conforme assim com a etymologia.
[9]Ver o assumpto, observar, attender.
[10]Cavoqueiro é qualificativo empregado para exprimir qualquer
qualidade má.
[11]Enganador.
[12]Termo peculiar aos sertões de Matto-Grosso—quer dizer parolar,
tagarellar.
CAPITULO II
O VIAJANTE
Proprio de espirito sorumbatico, é andar sempre calado: tagarellar é o

encanto e a alma da vida.
LA CHAUSSÉE.
Commigo, respondeu Sancho, meu primeiro movimento é logo tal
comichão de fallar que não posso deixar de desembuxar o que me vem
á bocca.
CERVANTES.—D. Quixote.
O dia 15 de Julho de 1860 era dia claro, sereno e fresco, como

costumam ser os chamados de inverno no interior do Brazil.
Ia o sol alto em seu percurso, illuminando com seus raios, não muito
ardentes para regiões intertropicaes, a estrada, cujo aspecto ha pouco
tentámos descrever e que da villa de Sant'Anna do Paranahyba vai ter
aos campos de Camapoan.
Á essa hora, um viajante, montado n'uma boa besta tordilho-
queimada, gorda e marchadeira seguia aquella estrada. A sua
physionomia e maneiras de trajar denunciavam de prompto que não era
homem de lida fadigosa e commum ou algum fazendeiro daquellas
cercanias que voltasse para casa. Trazia na cabeça um chapéu do Chile
de abas amplas e cingido de larga fita preta, sobre os hombros um
ponche-pala de variegadas cores e calçava botas de couro da Russia
bem feitas e em bom estado de conservação.
Tinha quando muito vinte e cinco annos, presença agradavel, olhos
negros e bem rasgados, barba e cabellos cortados quasi á escovinha e
ar tão intelligente quanto decidido.
Na mão empunhava uma comprida vara que havia pouco cortara, e
com que ia distrahidamente fustigando o ar ou batendo nos ramos de
arvores que se dobravam ao alcance do braço.
Vinha só e, no momento em que damos começo a esta singela
historia, achava-se no bonito trecho de caminho que medeia entre a
casa de Albino Lata e a do Leal, a sete boas leguas da sezonatica e
decadente villa de Sant'Anna do Paranahyba.
Nesta porção de estrada, ensombrada pelas arvores de vistoso
cerrado, o leito, ainda que já bastante arenoso, é firme e parece mais
álea de bem tratado jardim, do que caminho de tropas e carreadores.
Ainda augmenta os encantos daquelle lance a innumera quantidade
de rolas caboclas a brincar na areia e de pombas de cascavel, cujo

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Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Multiple Choice Questions

1. ___________ a relationship between expected return and risk.

C. Both CAPM and APT stipulate

D. Neither CAPM nor APT stipulate

E. No pricing model has been found.

E. factor sensitivities and factor betas.

B. The multifactor APT

C. Both the CAPM and the multifactor APT

D. Neither the CAPM nor the multifactor APT

E. None of the options is a true statement.

7. An arbitrage opportunity exists if an investor can construct a __________ investment portfolio

D. All of the options

E. None of the options

8. The APT was developed in 1976 by

B. Modigliani and Miller.

D. factor and market

E. factor, market, and index

B. capital asset pricing.

E. None of the options

A. a common macroeconomic factor.

D. a common macroeconomic factor and firm-specific factors.

E. A, the riskless asset

E. None of the options

A. an investor has downside risk only.

B. the law of prices is not violated.

C. the opportunity set is not tangent to the capital allocation line.

D. a risk-free arbitrage opportunity exists.

B. the mean-variance efficiency frontier.

D. the capital asset pricing model.

A. places more emphasis on market risk.

B. minimizes the importance of diversification.

C. recognizes multiple unsystematic risk factors.

D. recognizes multiple systematic risk factors.

B. identification of anticipated changes in production, inflation, and term structure as key

E. None of the options

35. In terms of the risk/return relationship in the APT,

A. only factor risk commands a risk premium in market equilibrium.

B. only systematic risk is related to expected returns.

C. only nonsystematic risk is related to expected returns.

36. The following factors might affect stock returns

A. the business cycle.

B. interest rate fluctuations.

D. All of the options

C. that risk need not be considered.

A. borrow at the risk-free rate and buy A.

B. sell A short and buy B.

C. sell B short and buy A.

D. borrow at the risk-free rate and buy B.

E. lend at the risk-free rate and buy B.

A. CAPM depends on risk-return dominance; APT depends on a no arbitrage condition.

D. All of the options are true.

E. Both CAPM depends on risk-return dominance; APT depends on a no arbitrage condition