Question 1

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. 
E)  the market proxy is mean/variance efficient and the CAPM is invalid. 
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. 
E)  the market proxy is mean/variance efficient and the CAPM is invalid.

Question 2

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 3

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 4

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 5

Petkova and Zhang (2005) examine the relationship between beta and the market risk premium and find

Accepted Answer

A)  a countercyclical beta is negative in good economies and positive in bad economies. 
B)  the beta of the HML portfolio is negative in good economies and positive in bad economies. 
C)  a cyclical beta is positive in good economies and negative in bad economies. 
D)  the beta of the HML portfolio is positive in good economies and negative in bad economies. 
E)  a countercyclical beta and the beta of the HML portfolio are negative in good economies and positive in bad economies. 
A)  a countercyclical beta is negative in good economies and positive in bad economies. 
B)  the beta of the HML portfolio is negative in good economies and positive in bad economies. 
C)  a cyclical beta is positive in good economies and negative in bad economies. 
D)  the beta of the HML portfolio is positive in good economies and negative in bad economies. 
E)  a countercyclical beta and the beta of the HML portfolio are negative in good economies and positive in bad economies.

Question 6

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. 
E)  Adding firm size to the model specification worsens 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. 
E)  Adding firm size to the model specification worsens the fit.

Question 7

The expected return/beta relationship is 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)  All of the options are correct. 
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)  All of the options are correct. 
E)  None of the options are correct.

Question 8

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 9

Which of the following must be done to test the multifactor CAPM or the APT? I) Specify the risk factors
II) Identify portfolios that hedge the risk factors
III) Test the explanatory power of hedge portfolios
IV) Test the risk premiums of hedge portfolios

Accepted Answer

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

Question 10

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 11

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 12

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

Accepted Answer

A)  the CAPM is invalid. 
B)  the proxy is inadequate. 
C)  either the CAPM is invalid or the proxy is inadequate. 
D)  the CAPM is valid and the proxy is adequate. 
E)  None of the options are correct. 
A)  the CAPM is invalid. 
B)  the proxy is inadequate. 
C)  either the CAPM is invalid or the proxy is inadequate. 
D)  the CAPM is valid and the proxy is adequate. 
E)  None of the options are correct.

Question 13

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 14

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 15

In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that __________ might be a proxy for systematic factors.

Accepted Answer

A)  the monthly growth rate in industrial production 
B)  unexpected inflation 
C)  expected inflation 
D)  the monthly growth rate in industrial production and unexpected inflation 
E)  the monthly growth rate in industrial production, unexpected inflation, and expected inflation 
A)  the monthly growth rate in industrial production 
B)  unexpected inflation 
C)  expected inflation 
D)  the monthly growth rate in industrial production and unexpected inflation 
E)  the monthly growth rate in industrial production, unexpected inflation, and expected inflation

Question 16

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 17

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 18

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. 
E)  Fama and MacBeth did not examine the relationship between excess returns and beta. 
A)  linear. 
B)  nonexistent. 
C)  as expected, based on 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 19

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, g2, 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 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. 
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.

Exam 13: Empirical Evidence on Security Returns

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

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

Petkova and Zhang (2005) examine the relationship between beta and the market risk premium and find

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

The expected return/beta relationship is used

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 must be done to test the multifactor CAPM or the APT? I) Specify the risk factors II) Identify portfolios that hedge the risk factors III) Test the explanatory power of hedge portfolios IV) Test the risk premiums of hedge portfolios

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

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.

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 beta.

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

In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that __________ might be a proxy for systematic factors.

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

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

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

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

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

Optimal Risky Portfolios

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_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