Exam 13: Empirical Evidence on Security Returns

Consider the regression equation: r_i - r_f = g₀ + g₁b_i + g₂s²(e_i) + e_it where: R_i - r_t = the average difference between the monthly return on stock i and the monthly risk-free rate B_i = the beta of stock i S²(e_i) = a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₁, to be

In the 1972 empirical study by Black, Jensen, and Scholes, they found that the risk-adjusted returns of high beta portfolios were _____________ the risk-adjusted returns of low beta portfolios.

Which of the following statements is false about models that attempt to measure the empirical performance of the CAPM? I) The conventional CAPM works better than the conditional CAPM with human capital. II) The conventional CAPM works about the same as the conditional CAPM with human capital. III) The conditional CAPM with human capital yields a better fit for empirical returns than the conventional CAPM.

Consider the regression equation: r_i - r_f = g₀ + g₁b₁ + g₂s²(e_i) + e_it Where: 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 S²(e_i) = a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₀, has to be

Tests of the CAPM that use regression techniques are subject to inaccuracies because

An extension of the Fama-French three-factor model includes a fourth factor to measure

In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor that did not appear to have significant explanatory power in explaining security returns was

Given the results of the early studies by Lintner (1965) and Miller and Scholes (1972), one would conclude that

The Fama-French model I) is a useful tool for benchmarking performance against a well-defined set of factors. II. premia are determined by market irrationality. III. premia are determined by rational risk factors. IV. is the reason that the premia is unsettled. V. is not a useful tool for benchmarking performance against a well-defined set of factors.

Consider the regression equation: r_i - r_f = g₀ + g₁b_i + g₂s²(e_i) + e_it Where: R_i - r_t = the average difference between the monthly return on stock i and the monthly risk-free rate B_i = the beta of stock i S²(e_i) = a measure of the nonsystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₂, to be

In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict.

The expected return/beta relationship is used

Jagannathan and Wang (2006) find that the CCAPM explains returns ______ the Fama-French three-factor model, and that the Fama-French three-factor model explains returns ______ the traditional CAPM.

A study by Mehra and Prescott (1985) found that historical average excess returns

In the 1972 empirical study by Black, Jensen, and Scholes, they found that the estimated slope of the security market line was _______ what the CAPM would predict.

A major finding by Heaton and Lucas (2000) is that

Fama and French (1992) found that

If a professionally-managed portfolio consistently outperforms the market proxy on a risk-adjusted basis and the market is efficient, it should be concluded that

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 nonsystematic risk and ________ to its beta.

__________ argued in his famous critique that tests of the expected return/beta relationship are invalid and that it is doubtful that the CAPM can ever be tested.