Question 1

The expected return/beta relationship is not used

Accepted Answer

A)  by regulatory commissions in determining the costs of capital for regulated firms. 
B)  in court rulings to determine discount rates to evaluate claims of lost future incomes. 
C)  to advise clients as to the composition of their portfolios. 
D)  by regulatory commissions in determining the costs of capital for regulated firms and to advise clients as to the composition of their portfolios. 
E)  None of the options are correct. 
A)  by regulatory commissions in determining the costs of capital for regulated firms. 
B)  in court rulings to determine discount rates to evaluate claims of lost future incomes. 
C)  to advise clients as to the composition of their portfolios. 
D)  by regulatory commissions in determining the costs of capital for regulated firms and to advise clients as to the composition of their portfolios. 
E)  None of the options are correct.

Question 2

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

Question 3

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. 
E)  the benchmark error, the security market line, and the capital 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. 
E)  the benchmark error, the security market line, and the capital market line.

Question 4

Which of the following factors will have a positive slope?

Accepted Answer

A)  size 
B)  sales 
C)  accruals in net working capital 
D)  volatility 
E)  dividend yield 
A)  size 
B)  sales 
C)  accruals in net working capital 
D)  volatility 
E)  dividend yield

Question 5

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

Question 6

In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor (the factors) that appeared to have significant explanatory power in explaining security returns was (were)

Accepted Answer

A)  the change in the expected rate of inflation. 
B)  the risk premium on corporate bonds. 
C)  the unexpected change in the rate of inflation. 
D)  industrial production. 
E)  the risk premium on corporate bonds, the unexpected change in the rate of inflation, and industrial production. 
A)  the change in the expected rate of inflation. 
B)  the risk premium on corporate bonds. 
C)  the unexpected change in the rate of inflation. 
D)  industrial production. 
E)  the risk premium on corporate bonds, the unexpected change in the rate of inflation, and industrial production.

Question 7

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

Question 8

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 
E)  not proportional 
A)  positively related 
B)  negatively related 
C)  unrelated 
D)  inversely related 
E)  not proportional

Question 9

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

Accepted Answer

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

Question 10

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.

Accepted Answer

A)  greater than 
B)  equal to 
C)  less than 
D)  unrelated to 
E)  More information is necessary to answer this question. 
A)  greater than 
B)  equal to 
C)  less than 
D)  unrelated to 
E)  More information is necessary to answer this question.

Question 11

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. 
E)  All of the options are correct. 
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. 
E)  All of the options are correct.

Question 12

Benchmark error

Accepted Answer

A)  refers to the use of an incorrect market proxy in tests of the CAPM. 
B)  can result in inconclusive tests of the CAPM. 
C)  can result in incorrect evaluation measures for portfolio managers. 
D)  refers to the use of an incorrect market proxy in tests of the CAPM and can result in inconclusive tests of the CAPM. 
E)  All of the options are correct. 
A)  refers to the use of an incorrect market proxy in tests of the CAPM. 
B)  can result in inconclusive tests of the CAPM. 
C)  can result in incorrect evaluation measures for portfolio managers. 
D)  refers to the use of an incorrect market proxy in tests of the CAPM and can result in inconclusive tests of the CAPM. 
E)  All of the options are correct.

Question 13

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. 
E)  the constant-growth dividend-discount model never works. 
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. 
E)  the constant-growth dividend-discount model never works.

Question 14

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

Accepted Answer

A)  the statistical results used are almost always incorrect. 
B)  the slope coefficient of the regression equation is biased downward. 
C)  the slope coefficient of the regression equation is biased upward. 
D)  the intercept of the regression equation is biased downward. 
E)  the intercept of the regression equation is equal to the risk-free rate. 
A)  the statistical results used are almost always incorrect. 
B)  the slope coefficient of the regression equation is biased downward. 
C)  the slope coefficient of the regression equation is biased upward. 
D)  the intercept of the regression equation is biased downward. 
E)  the intercept of the regression equation is equal to the risk-free rate.

Question 15

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.

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  I and II 
E)  II and III 
A)  I only 
B)  II only 
C)  III only 
D)  I and II 
E)  II and III

Question 16

The Fama and French three-factor model does not use ___ as one of the explanatory factors.

Accepted Answer

A)  industrial production 
B)  inflation 
C)  firm size 
D)  book-to-market ratio 
E)  industrial production or inflation 
A)  industrial production 
B)  inflation 
C)  firm size 
D)  book-to-market ratio 
E)  industrial production or inflation

Exam 13: Empirical Evidence on Security Returns

The expected return/beta relationship is not used

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

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

Which of the following factors will have a positive slope?

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

In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor (the factors) that appeared to have significant explanatory power in explaining security returns was (were)

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

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.

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

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.

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

Benchmark error

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

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

The Fama and French three-factor model does not use ___ as one of the explanatory factors.

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

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_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 This regression equation is used to estimate