Question 1

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. C

Question 2

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 3

Benchmark error

Accepted Answer

A) refers to the use of an incorrect market proxy in tests of the CAPM. 
B) can result in inconclusive tests of the CAPM. 
C) can result in incorrect evaluation measures for portfolio managers. 
D) A and B. 
E) A,B,and C. 
A) refers to the use of an incorrect market proxy in tests of the CAPM. 
B) can result in inconclusive tests of the CAPM. 
C) can result in incorrect evaluation measures for portfolio managers. 
D) A and B. 
E) A,B,and C. E

Question 4

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 above 
E) none of the above 
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 above 
E) none of the above

Question 5

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 corporate 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 corporate bonds 
C) the unexpected change in the rate of inflation 
D) industrial production 
E) B,C and D

Question 6

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 7

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) A and C 
E) none of the above 
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) A and C 
E) none of the above

Question 8

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 g0has 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 above. 
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 above.

Question 9

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

Question 10

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 above. 
E) none of the above. 
A) the security characteristic line. 
B) benchmark error. 
C) the capital market line. 
D) all of the above. 
E) none of the above.

Question 11

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 the above. 
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 the above.

Question 12

An extension of the Fama-French three-factor model was introduced by ________.

Accepted Answer

A) Black 
B) Scholes 
C) Carhart 
D) Jensen 
E) Miller 
A) Black 
B) Scholes 
C) Carhart 
D) Jensen 
E) Miller

Question 13

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 14

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 above 
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 above

Question 15

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) 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 16

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 above 
E) none of the above 
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 above 
E) none of the above

Question 17

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,g2to 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 above 
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 above

Question 18

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 19

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 the above. 
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 the above.

Question 20

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

Exam 13: Empirical Evidence on Security Returns

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

Benchmark error

The expected return/beta relationship is used ___________.

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________.

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.

The expected return/beta relationship is not used ___________.

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

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

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

An extension of the Fama-French three-factor model was introduced by ________.

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).

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

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

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

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

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

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.

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

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_it- r_ft= _ai+ 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

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