Exam 13: Empirical Evidence on Security Returns

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.

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

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

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

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

Describe some of the ways the CAPM is applied in practice.

The expected return/beta relationship is used

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

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

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

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

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

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

A major finding by Heaton and Lucas (2000) is that

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.

Consider the regression equation: r_i - r_f = g₀ + g₁b₁ + g₂s²(e_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 S²(e_i) = 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

__________ 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.

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

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