Question 1

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 2

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 these 
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 these

Question 3

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,and the change in proprietary wealth helps explain the rate of return of individual securities. 
E)  None of these is 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,and the change in proprietary wealth helps explain the rate of return of individual securities. 
E)  None of these is correct.

Question 4

Kothari,Shanken and Sloan (1994)use annual intervals to estimate stock betas and find

Accepted Answer

A)  the expected return-beta relationship is not statistically significant. 
B)  there has been substantial compensation for beta risk over the 1927-1941 period,but not since that time. 
C)  there has been substantial compensation for beta risk over the 1941-1990 period but not before that time. 
D)  there has been substantial compensation for beta risk over the 1941-1990 period and even more over the 1927-1990 period. 
E)  none of these. 
A)  the expected return-beta relationship is not statistically significant. 
B)  there has been substantial compensation for beta risk over the 1927-1941 period,but not since that time. 
C)  there has been substantial compensation for beta risk over the 1941-1990 period but not before that time. 
D)  there has been substantial compensation for beta risk over the 1941-1990 period and even more over the 1927-1990 period. 
E)  none of these.

Question 5

Jagannathan and Wang (2006)find that the CCAPM explains returns ______ the Fama-French 3-factor model and that the Fama-French 3-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 6

Fama and French,in their 1992 study,found that

Accepted Answer

A)  firm size had better explanatory power than beta in describing portfolio returns. 
B)  beta had better explanatory power than firm size in describing portfolio returns. 
C)  beta had better explanatory power than book-to-market ratios in describing portfolio returns. 
D)  macroeconomic factors had better explanatory power than beta in describing portfolio returns. 
E)  none of these is true. 
A)  firm size had better explanatory power than beta in describing portfolio returns. 
B)  beta had better explanatory power than firm size in describing portfolio returns. 
C)  beta had better explanatory power than book-to-market ratios in describing portfolio returns. 
D)  macroeconomic factors had better explanatory power than beta in describing portfolio returns. 
E)  none of these is true.

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 these 
E)  none of these 
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 these 
E)  none of these

Question 8

When portfolio performance is measured,what type of benchmark may be used? Explain what Roll meant by benchmark error.Draw a graph that shows how market proxies might produce betas that have no relation to expected returns.Briefly discuss the graph.

Accepted Answer

The benchmark portfolio should be broadl

Question 9

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)  the security market line 
C)  the capital market line 
D)  all of these 
E)  none of these 
A)  the security characteristic line 
B)  the security market line 
C)  the capital market line 
D)  all of these 
E)  none of these

Question 10

Black,Jensen,and Scholes examined the validity of the simple version of the CAPM and the zero beta version of the CAPM.Their empirical results were

Accepted Answer

A)  fully consistent with the simple version of the CAPM. 
B)  fully consistent with the zero beta version of the CAPM. 
C)  not fully consistent with either the simple version of the CAPM or the zero beta version of the CAPM,but were more consistent with the simple version of the CAPM. 
D)  not fully consistent with either the simple version of the CAPM or the zero beta version of the CAPM,but were more consistent with the zero beta version of the CAPM. 
E)  none of these. 
A)  fully consistent with the simple version of the CAPM. 
B)  fully consistent with the zero beta version of the CAPM. 
C)  not fully consistent with either the simple version of the CAPM or the zero beta version of the CAPM,but were more consistent with the simple version of the CAPM. 
D)  not fully consistent with either the simple version of the CAPM or the zero beta version of the CAPM,but were more consistent with the zero beta version of the CAPM. 
E)  none of these.

Question 11

Discuss the results of the studies of John Lintner (1965)and Merton Miller and Myron Scholes (1972)in terms of the validity of the capital asset pricing model (CAPM).

Accepted Answer

These studies examined the returns of 63

Question 12

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 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 13

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 these. 
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 these.

Question 14

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

Accepted Answer

A)  group securities into portfolios. 
B)  use a two-stage regression methodology. 
C)  reduce the precision of beta estimates. 
D)  Set alpha equal to one. 
E)  None of these. 
A)  group securities into portfolios. 
B)  use a two-stage regression methodology. 
C)  reduce the precision of beta estimates. 
D)  Set alpha equal to one. 
E)  None of these.

Question 15

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 these. 
E)  none of these. 
A)  establishing sample data. 
B)  estimating the security characteristic line. 
C)  estimating the security market line. 
D)  all of these. 
E)  none of these.

Question 16

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.

Accepted Answer

A)  positively related 
B)  negatively related 
C)  unrelated 
D)  related in a nonlinear fashion 
E)  none of these 
A)  positively related 
B)  negatively related 
C)  unrelated 
D)  related in a nonlinear fashion 
E)  none of these

Question 17

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

Question 18

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 these 
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 these

Question 19

Davis,Fama,and French (2000)created three B/M ratio groups.The firms with a high B/M ratio are often called

Accepted Answer

A)  value firms. 
B)  growth firms. 
C)  midcap firms. 
D)  blend firms. 
E)  None of these is correct. 
A)  value firms. 
B)  growth firms. 
C)  midcap firms. 
D)  blend firms. 
E)  None of these is correct.

Question 20

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

Exam 11: Managing Bond Portfolios

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.

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:

Kothari,Shanken and Sloan (1994)use annual intervals to estimate stock betas and find

Jagannathan and Wang (2006)find that the CCAPM explains returns ______ the Fama-French 3-factor model and that the Fama-French 3-factor model explains returns ______ the traditional CAPM.

Fama and French,in their 1992 study,found that

The expected return/beta relationship is used ___________.

When portfolio performance is measured,what type of benchmark may be used? Explain what Roll meant by benchmark error.Draw a graph that shows how market proxies might produce betas that have no relation to expected returns.Briefly discuss the graph.

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

Black,Jensen,and Scholes examined the validity of the simple version of the CAPM and the zero beta version of the CAPM.Their empirical results were

Discuss the results of the studies of John Lintner (1965)and Merton Miller and Myron Scholes (1972)in terms of the validity of the capital asset pricing model (CAPM).

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

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

Early tests of the CAPM involved

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.

Fama and MacBeth found that the relationship between average excess returns and betas was ___________.

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 _______________.

Davis,Fama,and French (2000)created three B/M ratio groups.The firms with a high B/M ratio are often called

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

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Jagannathan and Wang (2006)find that the CCAPM explains returns the Fama-French 3-factor model and that the Fama-French 3-factor model explains returns the traditional CAPM.

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