Question 1

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

Accepted Answer

A) industrial production; term spread; default spread 
B) industrial production; inflation; default spread 
C) firm size; book-to-market ratio; market index 
D) firm size; book-to-market ratio; default spread 
E) None of the options 
A) industrial production; term spread; default spread 
B) industrial production; inflation; default spread 
C) firm size; book-to-market ratio; market index 
D) firm size; book-to-market ratio; default spread 
E) None of the options

Question 2

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.

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and II 
E) II and III 
A) I only 
B) II only 
C) III only 
D) I and II 
E) II and III

Question 3

Liew and Vassalou (2000) show that returns on style portfolios (SMB and HML)

Accepted Answer

A) seem like statistical flukes. 
B) seem to predict GDP growth. 
C) may be proxies for business cycle risk. 
D) seem to predict GDP growth and may be proxies for business cycle risk. 
E) None of the options 
A) seem like statistical flukes. 
B) seem to predict GDP growth. 
C) may be proxies for business cycle risk. 
D) seem to predict GDP growth and may be proxies for business cycle risk. 
E) None of the options

Question 4

The expected return/beta relationship is not 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) by regulatory commissions in determining the costs of capital for regulated firms and to advise clients as to the composition of their portfolios. 
E) None of the options 
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) by regulatory commissions in determining the costs of capital for regulated firms and to advise clients as to the composition of their portfolios. 
E) None of the options

Question 5

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 6

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 
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

Question 7

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.

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 8

Jagannathan and Wang (2006) find that the CCAPM explains returns ______ the Fama-French three-factor model and that the Fama-French three-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 9

Discuss Roll's critique of the CAPM.

Accepted Answer

In 1977, Richard Roll published a critiq

Question 10

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 the options 
A) positively related 
B) negatively related 
C) unrelated 
D) related in a nonlinear fashion 
E) None of the options

Question 11

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 the options 
E) None of the options 
A) establishing sample data. 
B) estimating the security characteristic line. 
C) estimating the security market line. 
D) All of the options 
E) None of the options

Question 12

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) benchmark error. 
C) the capital market line. 
D) All of the options 
E) None of the options 
A) the security characteristic line. 
B) benchmark error. 
C) the capital market line. 
D) All of the options 
E) None of the options

Question 13

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 nonsystematic risk and ________ to its beta.

Accepted Answer

A) positively related; negatively related 
B) negatively related; positively related 
C) positively related; positively related 
D) negatively related; negatively related 
E) not related; not related 
A) positively related; negatively related 
B) negatively related; positively related 
C) positively related; positively related 
D) negatively related; negatively related 
E) not related; not related

Question 14

Tests of multifactor models indicate

Accepted Answer

A) the single-factor model has better explanatory power in estimating security returns. 
B) macroeconomic variables have no explanatory power in estimating security returns. 
C) it may be possible to hedge some economic factors that affect future consumption risk with appropriate portfolios. 
D) multifactor models do not work. 
E) None of the options 
A) the single-factor model has better explanatory power in estimating security returns. 
B) macroeconomic variables have no explanatory power in estimating security returns. 
C) it may be possible to hedge some economic factors that affect future consumption risk with appropriate portfolios. 
D) multifactor models do not work. 
E) None of the options

Question 15

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 
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

Question 16

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.

Exam 13: Empirical Evidence on Security Returns

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

Liew and Vassalou (2000) show that returns on style portfolios (SMB and HML)

The expected return/beta relationship is not used

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

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

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

Discuss Roll's critique of the CAPM.

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.

Early tests of the CAPM involved

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

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 nonsystematic risk and ________ to its beta.

Tests of multifactor models indicate

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

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

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

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

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 nonsystematic risk and to its beta.

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