Exam 13: Empirical Evidence on Security Returns

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

__________ 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.

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

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

The CAPM is not testable unless

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.

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)

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

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

The Fama and French three factor model uses ___, ___, and ___ as factors.

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.

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

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

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

Early tests of the CAPM involved

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.

Liquidity embodies several characteristics, such as

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.

Benchmark error

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.