Question 1

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. 
E)  None 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. 
E)  None of the options are correct.

Question 2

The Fama-French modelI) 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 are unsettled.V) is not a useful tool for benchmarking performance against a well-defined set of factors.

Accepted Answer

A)  I only 
B)  V only 
C)  I and II 
D)  I and IV 
E)  II and V 
A)  I only 
B)  V only 
C)  I and II 
D)  I and IV 
E)  II and V

Question 3

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.

Accepted Answer

A)  higher than 
B)  equal to 
C)  less than 
D)  twice as much as 
E)  More information is required to answer this question. 
A)  higher than 
B)  equal to 
C)  less than 
D)  twice as much as 
E)  More information is required to answer this question.

Question 4

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.

Accepted Answer

A)  positively related; negatively related 
B)  negatively related; positively related 
C)  positively related; positively related 
D)  negatively related; negatively related 
E)  not related; not related 
A)  positively related; negatively related 
B)  negatively related; positively related 
C)  positively related; positively related 
D)  negatively related; negatively related 
E)  not related; not related

Question 5

The research by Fama and French suggesting that CAPM is invalid has generated which of the following responses?

Accepted Answer

A)  Better econometrics should be used in the test procedure. 
B)  Estimates of asset betas need to be improved. 
C)  Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered. 
D)  The single-index model needs to account for nontraded assets and the cyclical behavior of asset betas. 
E)  All of the options are correct. 
A)  Better econometrics should be used in the test procedure. 
B)  Estimates of asset betas need to be improved. 
C)  Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered. 
D)  The single-index model needs to account for nontraded assets and the cyclical behavior of asset betas. 
E)  All of the options are correct.

Question 6

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.

Accepted Answer

A)  worse than; worse than 
B)  worse than; better than 
C)  better than; better than 
D)  better than; worse than 
E)  equally as well as; equally as well as 
A)  worse than; worse than 
B)  worse than; better than 
C)  better than; better than 
D)  better than; worse than 
E)  equally as well as; equally as well as

Question 7

Consider the regression equation: ri − rf = g0 + g1b1 + g2s2(ei) + 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
S2(ei) = 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

Accepted Answer

A)  0. 
B)  1. 
C)  equal to the risk-free rate of return. 
D)  equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate. 
E)  None of the options are correct. 
A)  0. 
B)  1. 
C)  equal to the risk-free rate of return. 
D)  equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate. 
E)  None of the options are correct.

Question 8

The liquidity of illiquid stocks with high liquidity betas that generate higher average returns is referred to as a(n) _____________.

Accepted Answer

A)  premium. 
B)  alpha. 
C)  market inefficiency. 
D)  priced factor. 
E)  None of the options are correct. 
A)  premium. 
B)  alpha. 
C)  market inefficiency. 
D)  priced factor. 
E)  None of the options are correct.

Question 9

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

Accepted Answer

A)  have been too small to be consistent with rational security pricing. 
B)  have been too large to be consistent with rational security pricing. 
C)  have been too small to be consistent with fractional security pricing. 
D)  prove CAPM is incorrect. 
E)  prove the market is efficient. 
A)  have been too small to be consistent with rational security pricing. 
B)  have been too large to be consistent with rational security pricing. 
C)  have been too small to be consistent with fractional security pricing. 
D)  prove CAPM is incorrect. 
E)  prove the market is efficient.

Question 10

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. 
E)  None 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. 
E)  None of the options are correct.

Question 11

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. 
E)  None 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. 
E)  None of the options are correct.

Question 12

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

Accepted Answer

A)  quasilinear. 
B)  nonexistent. 
C)  refutes earlier studies. 
D)  linear and as expected, based on earlier studies. 
E)  Fama and MacBeth did not examine the relationship between excess returns and beta. 
A)  quasilinear. 
B)  nonexistent. 
C)  refutes earlier studies. 
D)  linear and as expected, based on earlier studies. 
E)  Fama and MacBeth did not examine the relationship between excess returns and beta.

Question 13

Consider the regression equation: ri − rf = g0 + g1bi + g2s2(ei) + eit
Where:
Ri − rt = the average difference between the monthly return on stock i and the monthly risk-free rate
Bi = the beta of stock i
S2(ei) = 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

Accepted Answer

A)  0. 
B)  1. 
C)  equal to the risk-free rate of return. 
D)  equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate. 
E)  equal to the average monthly return on the market portfolio. 
A)  0. 
B)  1. 
C)  equal to the risk-free rate of return. 
D)  equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate. 
E)  equal to the average monthly return on the market portfolio.

Question 14

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. 
E)  None of the options are correct. 
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. 
E)  None of the options are correct.

Question 15

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

Accepted Answer

A)  the market rate of return does not help explain the rate of return of individual securities, and CAPM must be rejected. 
B)  the market rate of return does explain the rate of return of individual securities. 
C)  the change in proprietary wealth helps explain the rate of return of individual securities. 
D)  the market rate of return does not help explain the rate of return of individual securities, and CAPM must be rejected, but the change in proprietary wealth helps explain the rate of return of individual securities. 
E)  None of the options are correct. 
A)  the market rate of return does not help explain the rate of return of individual securities, and CAPM must be rejected. 
B)  the market rate of return does explain the rate of return of individual securities. 
C)  the change in proprietary wealth helps explain the rate of return of individual securities. 
D)  the market rate of return does not help explain the rate of return of individual securities, and CAPM must be rejected, but the change in proprietary wealth helps explain the rate of return of individual securities. 
E)  None of the options are correct.

Question 16

Strongest evidence in support of the CAPM has come from demonstrating that

Accepted Answer

A)  the market beta is equal to 1.0. 
B)  nonsystematic risk has significant explanatory power in estimating security returns. 
C)  the average return-beta relationship is highly significant. 
D)  the intercept in tests of the excess returns-beta relationship is exactly zero. 
E)  professional investors do not generally outperform market indexes, demonstrating that the market is efficient. 
A)  the market beta is equal to 1.0. 
B)  nonsystematic risk has significant explanatory power in estimating security returns. 
C)  the average return-beta relationship is highly significant. 
D)  the intercept in tests of the excess returns-beta relationship is exactly zero. 
E)  professional investors do not generally outperform market indexes, demonstrating that the market is efficient.

Question 17

Which of the following is NOT an addition to the Fama and French (1992) model.

Accepted Answer

A)  turnover 
B)  volatility 
C)  trine measure 
D)  working capital accruals 
E)  All are correct. 
A)  turnover 
B)  volatility 
C)  trine measure 
D)  working capital accruals 
E)  All are correct.

Question 18

__________ 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.

Accepted Answer

A)  Kim 
B)  Markowitz 
C)  Modigliani 
D)  Roll 
E)  None of the options are correct. 
A)  Kim 
B)  Markowitz 
C)  Modigliani 
D)  Roll 
E)  None of the options are correct.

Question 19

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

Accepted Answer

A)  high beta stocks tend to outperform the predictions of the CAPM. 
B)  low beta stocks tend to outperform the predictions of the CAPM. 
C)  there is no relationship between beta and the predictions of the CAPM. 
D)  high beta stocks and low beta stocks tend to outperform the predictions of the CAPM. 
E)  None of the options are correct. 
A)  high beta stocks tend to outperform the predictions of the CAPM. 
B)  low beta stocks tend to outperform the predictions of the CAPM. 
C)  there is no relationship between beta and the predictions of the CAPM. 
D)  high beta stocks and low beta stocks tend to outperform the predictions of the CAPM. 
E)  None of the options are correct.

Question 20

Which of the following factors will have a negative slope?

Accepted Answer

A)  book-to-market ratio 
B)  momentum 
C)  beta 
D)  turnover 
A)  book-to-market ratio 
B)  momentum 
C)  beta 
D)  turnover

Exam 13: Empirical Evidence on Security Returns

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

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.

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.

The research by Fama and French suggesting that CAPM is invalid has generated which of the following responses?

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.

The liquidity of illiquid stocks with high liquidity betas that generate higher average returns is referred to as a(n) _____________.

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

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

Early tests of the CAPM involved

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

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

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

Strongest evidence in support of the CAPM has come from demonstrating that

Which of the following is NOT an addition to the Fama and French (1992) model.

__________ 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.

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

Which of the following factors will have a negative slope?

The Investment Environment

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

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral 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

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.

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.