Question 1

Equity premium puzzle studies may be subject to survivorship bias because

Accepted Answer

A)  the time period covered was not long enough. 
B)  an inappropriate index was used. 
C)  the indexes used did not exist for the whole period of the study. 
D)  both U.S.and foreign data were used. 
E)  only U.S.data were used. 
A)  the time period covered was not long enough. 
B)  an inappropriate index was used. 
C)  the indexes used did not exist for the whole period of the study. 
D)  both U.S.and foreign data were used. 
E)  only U.S.data were used. E

Question 2

Fama and French (2000)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. C

Question 3

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.the reason for the premia is 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. D

Question 4

__________ 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 these 
A)  Kim 
B)  Markowitz 
C)  Modigliani 
D)  Roll 
E)  none of these

Question 5

Discuss the Black Jensen Scholes (BJS)study of the zero-beta version of the CAPM.

Accepted Answer

Black,Jensen,and Scholes studied all ava

Question 6

Discuss Roll's critique of the CAPM.

Accepted Answer

In 1977,Richard Roll published a critiqu

Question 7

Liquidity embodies several characteristics such as ________.

Accepted Answer

A)  trading costs 
B)  ease of sale 
C)  market depth 
D)  necessary price concessions to effect a quick transaction 
E)  All of these are correct. 
A)  trading costs 
B)  ease of sale 
C)  market depth 
D)  necessary price concessions to effect a quick transaction 
E)  All of these are correct.

Question 8

In the results of the earliest estimations of the security market line by Lintner (1965)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

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

Accepted Answer

A)  the monthly growth rate in industrial production might be a proxy 
B)  unexpected inflation might be a proxy 
C)  expected inflation might be a proxy 
D)  a and b 
E)  a,b,and c 
A)  the monthly growth rate in industrial production might be a proxy 
B)  unexpected inflation might be a proxy 
C)  expected inflation might be a proxy 
D)  a and b 
E)  a,b,and c

Question 10

In the empirical study of a multi-factor model by Chen,Roll,and Ross,a factor that appeared to have significant explanatory power in explaining security returns was

Accepted Answer

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

Question 11

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 these are true. 
E)  None of these is true. 
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 these are true. 
E)  None of these is true.

Question 12

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)  a and b 
E)  none of these 
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)  a and b 
E)  none of these

Question 13

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)  a and b. 
E)  a,b,and c. 
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)  a and b. 
E)  a,b,and c.

Question 14

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 15

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

Accepted Answer

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

Question 16

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 these 
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 these

Question 17

A study by Mehra and Prescott (1985)covered a period of ______ years and found that historical average excess returns _________.

Accepted Answer

A)  25,have been too small to be consistent with rational security pricing. 
B)  25,have been too large to be consistent with rational security pricing. 
C)  90,have been too small to be consistent with rational security pricing. 
D)  90,have been too large to be consistent with rational security pricing. 
E)  25,are consistent with rational security pricing. 
A)  25,have been too small to be consistent with rational security pricing. 
B)  25,have been too large to be consistent with rational security pricing. 
C)  90,have been too small to be consistent with rational security pricing. 
D)  90,have been too large to be consistent with rational security pricing. 
E)  25,are consistent with rational security pricing.

Question 18

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)  a and b 
E)  b and c 
A)  the CAPM is valid 
B)  the market proxy is mean/variance efficient 
C)  the CAPM is invalid 
D)  a and b 
E)  b and c

Question 19

Which of the following is(are)a 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)ratio 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.

Accepted Answer

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

Question 20

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 these are correct. 
E)  None of these is 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 these are correct. 
E)  None of these is correct.

Equity premium puzzle studies may be subject to survivorship bias because

Fama and French (2000)studied the equity premium puzzle by breaking their sample into subperiods and found 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.

Discuss the Black Jensen Scholes (BJS)study of the zero-beta version of the CAPM.

Discuss Roll's critique of the CAPM.

Liquidity embodies several characteristics such as ________.

In the results of the earliest estimations of the security market line by Lintner (1965)and Scholes (1972),it was found that the average difference between a stock's return and the risk-free rate was ________ to its beta.

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

In the empirical study of a multi-factor model by Chen,Roll,and Ross,a factor that appeared to have significant explanatory power in explaining security returns was

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

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

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

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.

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

A study by Mehra and Prescott (1985)covered a period of years and found that historical average excess returns ___.

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

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

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

Exam 11: Managing Bond Portfolios

Equity premium puzzle studies may be subject to survivorship bias because

Fama and French (2000)studied the equity premium puzzle by breaking their sample into subperiods and found 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.

Discuss the Black Jensen Scholes (BJS)study of the zero-beta version of the CAPM.

Discuss Roll's critique of the CAPM.

Liquidity embodies several characteristics such as ________.

In the results of the earliest estimations of the security market line by Lintner (1965)and Scholes (1972),it was found that the average difference between a stock's return and the risk-free rate was ________ to its beta.

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

In the empirical study of a multi-factor model by Chen,Roll,and Ross,a factor that appeared to have significant explanatory power in explaining security returns was

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

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

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

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.

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

A study by Mehra and Prescott (1985)covered a period of ______ years and found that historical average excess returns _________.

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

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

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Globalization and International Investing

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

A study by Mehra and Prescott (1985)covered a period of years and found that historical average excess returns ___.