Question 1

Fama and MacBeth (1973) found that the relationship between average excess returns and betas was

Accepted Answer

A) linear. 
B) nonexistent. 
C) as expected, based on earlier studies. 
D) linear and as expected, based on earlier studies. 
A) linear. 
B) nonexistent. 
C) as expected, based on earlier studies. 
D) linear and as expected, based on earlier studies. D

Question 2

If a market proxy portfolio consistently beats all professionally-managed portfolios on a risk-adjusted basis, it may be concluded that

Accepted Answer

A) the CAPM is valid. 
B) the market proxy is mean/variance efficient. 
C) the CAPM is invalid. 
D) the CAPM is valid and the market proxy is mean/variance efficient. 
A) the CAPM is valid. 
B) the market proxy is mean/variance efficient. 
C) the CAPM is invalid. 
D) the CAPM is valid and the market proxy is mean/variance efficient. D

Question 3

An extension of the Fama-French three-factor model was introduced by

Accepted Answer

A) Black. 
B) Scholes. 
C) Carhart. 
D) Jensen. 
A) Black. 
B) Scholes. 
C) Carhart. 
D) Jensen. C

Question 4

Which of the following statements is true about models that attempt to measure the empirical performance of the CAPM?

Accepted Answer

A) The conventional CAPM works better than the conditional CAPM with human capital. 
B) The conventional CAPM works about the same as the conditional CAPM with human capital. 
C) The conditional CAPM with human capital yields a better fit for empirical returns than the conventional CAPM. 
D) Adding firm size to the model specification dramatically improves the fit. 
A) The conventional CAPM works better than the conditional CAPM with human capital. 
B) The conventional CAPM works about the same as the conditional CAPM with human capital. 
C) The conditional CAPM with human capital yields a better fit for empirical returns than the conventional CAPM. 
D) Adding firm size to the model specification dramatically improves the fit.

Question 5

In the results of the earliest estimations of the security market line by Lintner (1965) and by Miller and Scholes (1972), it was found that the average difference between a stock's return and the risk-free rate was ________ to its nonsystematic risk.

Accepted Answer

A) positively related 
B) negatively related 
C) unrelated 
D) related in a nonlinear fashion 
A) positively related 
B) negatively related 
C) unrelated 
D) related in a nonlinear fashion

Question 6

Tests of multifactor models indicate

Accepted Answer

A) the single-factor model has better explanatory power in estimating security returns. 
B) macroeconomic variables have no explanatory power in estimating security returns. 
C) it may be possible to hedge some economic factors that affect future-consumption risk with appropriate portfolios. 
D) multifactor models do not work. 
A) the single-factor model has better explanatory power in estimating security returns. 
B) macroeconomic variables have no explanatory power in estimating security returns. 
C) it may be possible to hedge some economic factors that affect future-consumption risk with appropriate portfolios. 
D) multifactor models do not work.

Question 7

Consider the regression equation: rit - rft = ai + bi(rmt - rft) + eit
Where:
Rit = return on stock i in month t
Rft = the monthly risk-free rate of return in month t
Rmt = the return on the market portfolio proxy in month t
This regression equation is used to estimate

Accepted Answer

A) the security characteristic line. 
B) benchmark error. 
C) the capital market line. 
D) All of the options are correct. 
A) the security characteristic line. 
B) benchmark error. 
C) the capital market line. 
D) All of the options are correct.

Question 8

Kandel and Stambaugh (1995) expanded Roll's critique of the CAPM by arguing that tests rejecting a positive relationship between average return and beta are demonstrating

Accepted Answer

A) the inefficiency of the market proxy used in the tests. 
B) that the relationship between average return and beta is not linear. 
C) that the relationship between average return and beta is negative. 
D) the need for a better way of explaining security returns. 
A) the inefficiency of the market proxy used in the tests. 
B) that the relationship between average return and beta is not linear. 
C) that the relationship between average return and beta is negative. 
D) the need for a better way of explaining security returns.

Question 9

In the results of the earliest estimations of the security market line by Miller and Scholes (1972), it was found that the average difference between a stock's return and the risk-free rate was ________ to its beta.

Accepted Answer

A) positively related 
B) negatively related 
C) unrelated 
D) inversely related 
A) positively related 
B) negatively related 
C) unrelated 
D) inversely related

Question 10

In their multifactor model, Chen, Roll, and Ross found

Accepted Answer

A) that two market indexes, the equally-weighted NYSE and the value-weighted NYSE, were not significant predictors of security returns. 
B) that the value-weighted NYSE index had the incorrect sign, implying a negative market risk premium. 
C) expected changes in inflation-predicted security returns. 
D) that two market indexes, the equally-weighted NYSE and the value-weighted NYSE, were not significant predictors of security returns and that the value-weighted NYSE index had the incorrect sign, implying a negative market risk premium. 
A) that two market indexes, the equally-weighted NYSE and the value-weighted NYSE, were not significant predictors of security returns. 
B) that the value-weighted NYSE index had the incorrect sign, implying a negative market risk premium. 
C) expected changes in inflation-predicted security returns. 
D) that two market indexes, the equally-weighted NYSE and the value-weighted NYSE, were not significant predictors of security returns and that the value-weighted NYSE index had the incorrect sign, implying a negative market risk premium.

Question 11

Fama and French (2002) studied the equity premium puzzle by breaking their sample into subperiods and found that

Accepted Answer

A) the equity premium was largest throughout the entire 1872-1999 period. 
B) the equity premium was largest during the 1872-1949 subperiod. 
C) the equity premium was largest during the 1950-1999 subperiod. 
D) the differences in equity premiums for the three time periods were statistically insignificant. 
A) the equity premium was largest throughout the entire 1872-1999 period. 
B) the equity premium was largest during the 1872-1949 subperiod. 
C) the equity premium was largest during the 1950-1999 subperiod. 
D) the differences in equity premiums for the three time periods were statistically insignificant.

Question 12

Liew and Vassalou (2000) show that returns on style portfolios (SMB and HML)

Accepted Answer

A) seem like statistical flukes. 
B) seem to predict GDP growth. 
C) may be proxies for business cycle risk. 
D) seem to predict GDP growth and may be proxies for business cycle risk. 
A) seem like statistical flukes. 
B) seem to predict GDP growth. 
C) may be proxies for business cycle risk. 
D) seem to predict GDP growth and may be proxies for business cycle risk.

Question 13

Studies by Chan, Karceski, and Lakonishok (2003) and La Porta, Lakonishok, Shleifer, and Vishny (1997) report that

Accepted Answer

A) the value premium is a manifestation of market irrationality. 
B) the value premium is a rational risk premia. 
C) the value premium is a statistical artifact found only in the U.S. 
D) All of the options are correct. 
A) the value premium is a manifestation of market irrationality. 
B) the value premium is a rational risk premia. 
C) the value premium is a statistical artifact found only in the U.S. 
D) All of the options are correct.

Question 14

The CAPM is not testable unless

Accepted Answer

A) the exact composition of the true market portfolio is known and used in the tests. 
B) all individual assets are included in the market proxy. 
C) the market proxy and the true market portfolio are highly negatively correlated. 
D) the exact composition of the true market portfolio is known and used in the tests, and all individual assets are included in the market proxy. 
A) the exact composition of the true market portfolio is known and used in the tests. 
B) all individual assets are included in the market proxy. 
C) the market proxy and the true market portfolio are highly negatively correlated. 
D) the exact composition of the true market portfolio is known and used in the tests, and all individual assets are included in the market proxy.

Question 15

According to Roll, the only testable hypothesis associated with the CAPM is

Accepted Answer

A) the number of ex-post mean-variance efficient portfolios. 
B) the exact composition of the market portfolio. 
C) whether the market portfolio is mean-variance efficient. 
D) the SML relationship. 
A) the number of ex-post mean-variance efficient portfolios. 
B) the exact composition of the market portfolio. 
C) whether the market portfolio is mean-variance efficient. 
D) the SML relationship.

Question 16

One way that Black, Jensen and Scholes overcame the problem of measurement error was to

Accepted Answer

A) group securities into portfolios. 
B) use a two-stage regression methodology. 
C) reduce the precision of beta estimates. 
D) set alpha equal to one. 
A) group securities into portfolios. 
B) use a two-stage regression methodology. 
C) reduce the precision of beta estimates. 
D) set alpha equal to one.

Question 17

Consider the regression equation: ri - rf = g0 + g1bi + eit
where:
Ri - rf = the average difference between the monthly return on stock i and the monthly risk-free rate
Bi = the beta of stock i
This regression equation is used to estimate

Accepted Answer

A) the benchmark error. 
B) the security market line. 
C) the capital market line. 
D) the benchmark error and the security market line. 
A) the benchmark error. 
B) the security market line. 
C) the capital market line. 
D) the benchmark error and the security market line.

Question 18

Early tests of the CAPM involved

Accepted Answer

A) establishing sample data. 
B) estimating the security characteristic line. 
C) estimating the security market line. 
D) All of the options are correct. 
A) establishing sample data. 
B) estimating the security characteristic line. 
C) estimating the security market line. 
D) All of the options are correct.

Question 19

Which of the following is a (are) result(s) of the Fama and French (2002) study of the equity premium puzzle? I) Average realized returns during 1950-1999 exceeded the internal rate of return (IRR) for corporate investments.
II) The statistical precision of average historical returns is far higher than the precision of estimates from the dividend-discount model (DDM).
III) The reward-to-variability ratio (Sharpe) derived from the DDM is far more stable than that derived from realized returns.
IV) There is no difference between DDM estimates and actual returns with regard to IRR, statistical precision, or the Sharpe measure.

Accepted Answer

A) I, II, and III 
B) I and III 
C) I and II 
D) II and III 
A) I, II, and III 
B) I and III 
C) I and II 
D) II and III

Question 20

Which of the following would be required for tests of the multifactor CAPM and APT?

Accepted Answer

A) Specification of risk factors 
B) Identification of portfolios that hedge these fundamental risk factors 
C) Tests of the explanatory power and risk premiums of the hedge portfolios 
D) All of the options are correct. 
A) Specification of risk factors 
B) Identification of portfolios that hedge these fundamental risk factors 
C) Tests of the explanatory power and risk premiums of the hedge portfolios 
D) All of the options are correct.

Exam 13: Empirical Evidence on Security Returns

Fama and MacBeth (1973) found that the relationship between average excess returns and betas was

If a market proxy portfolio consistently beats all professionally-managed portfolios on a risk-adjusted basis, it may be concluded that

An extension of the Fama-French three-factor model was introduced by

Which of the following statements is true about models that attempt to measure the empirical performance of the CAPM?

In the results of the earliest estimations of the security market line by Lintner (1965) and by Miller and Scholes (1972), it was found that the average difference between a stock's return and the risk-free rate was ________ to its nonsystematic risk.

Tests of multifactor models indicate

Consider the regression equation: rit - rft = ai + bi(rmt - rft) + eit Where: Rit = return on stock i in month t Rft = the monthly risk-free rate of return in month t Rmt = the return on the market portfolio proxy in month t This regression equation is used to estimate

Kandel and Stambaugh (1995) expanded Roll's critique of the CAPM by arguing that tests rejecting a positive relationship between average return and beta are demonstrating

In the results of the earliest estimations of the security market line by Miller and Scholes (1972), it was found that the average difference between a stock's return and the risk-free rate was ________ to its beta.

In their multifactor model, Chen, Roll, and Ross found

Fama and French (2002) studied the equity premium puzzle by breaking their sample into subperiods and found that

Liew and Vassalou (2000) show that returns on style portfolios (SMB and HML)

Studies by Chan, Karceski, and Lakonishok (2003) and La Porta, Lakonishok, Shleifer, and Vishny (1997) report that

The CAPM is not testable unless

According to Roll, the only testable hypothesis associated with the CAPM is

One way that Black, Jensen and Scholes overcame the problem of measurement error was to

Consider the regression equation: ri - rf = g0 + g1bi + eit where: Ri - rf = the average difference between the monthly return on stock i and the monthly risk-free rate Bi = the beta of stock i This regression equation is used to estimate

Early tests of the CAPM involved

Which of the following would be required for tests of the multifactor CAPM and APT?

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Consider the regression equation: r_it - r_ft = a_i + b_i(r_mt - r_ft) + e_it Where: R_it = return on stock i in month t R_ft = the monthly risk-free rate of return in month t R_mt = the return on the market portfolio proxy in month t This regression equation is used to estimate

Consider the regression equation: r_i - r_f = g₀ + g₁b_i + e_itwhere: R_i - r_f = the average difference between the monthly return on stock i and the monthly risk-free rate B_i = the beta of stock i This regression equation is used to estimate