In the One Factor (APT) Model, the Characteristic Line to Estimate

question 21

Multiple Choice

In the one factor (APT) model, the characteristic line to estimate bi passes through the origin, unlike the estimate used in the CAPM because:

• A)the relationship is between the actual return on a security and the market index.
• B)the relationship measures the change in the security return over time versus the change in
• The market return.
• C)the relationship measures the change in excess return on a security versus GNP.
• D)the relationship measures the change in excess return on a security versus the return on
• The factor about its mean of zero.
• E)Cannot be determined without actual data.

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Definitions:

Required Rate Of Return

The rate that is generally based on the company’s cost of capital.

Operating Costs

Expenses associated with the day-to-day functions of a business, excluding costs related to production.

Salvage Value

Salvage value is the estimated residual value of an asset at the end of its useful life.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded against a fixed asset since its acquisition, reflecting its loss in value over time.