Question 1

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 2

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

Accepted Answer

The four items mentioned at the beginnin

Question 3

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 the above. 
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 the above.

Question 4

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

Accepted Answer

A) have been too small to be consistent with rational security pricing 
B) have been too large to be consistent with rational security pricing 
C) have been too small to be consistent with fractional security pricing 
D) prove CAPM is incorrect 
E) prove the market is efficient 
A) have been too small to be consistent with rational security pricing 
B) have been too large to be consistent with rational security pricing 
C) have been too small to be consistent with fractional security pricing 
D) prove CAPM is incorrect 
E) prove the market is efficient

Question 5

Discuss Roll's critique of the CAPM.

Accepted Answer

In 1977, Richard Roll published a critiq

Question 6

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

Accepted Answer

A) Better econometrics should be used in the test procedure. 
B) Estimates of asset betas need to be improved. 
C) Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered. 
D) The single-index model needs to account for non-traded assets and the cyclical behavior of asset betas. 
E) All of the above 
A) Better econometrics should be used in the test procedure. 
B) Estimates of asset betas need to be improved. 
C) Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered. 
D) The single-index model needs to account for non-traded assets and the cyclical behavior of asset betas. 
E) All of the above

Question 7

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 8

The CAPM is not testable unless

Accepted Answer

A) the exact composition of the true market portfolio is known and used in the tests. 
B) all individual assets are included in the market proxy. 
C) the market proxy and the true market portfolio are highly negatively correlated. 
D) A and B. 
E) B and C. 
A) the exact composition of the true market portfolio is known and used in the tests. 
B) all individual assets are included in the market proxy. 
C) the market proxy and the true market portfolio are highly negatively correlated. 
D) A and B. 
E) B and C.

Question 9

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 is2(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,g1to 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) equal to the average monthly return on the market portfolio. 
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) equal to the average monthly return on the market portfolio.

Question 10

Fama and French (2002)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.

Question 11

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 the above. 
A) value firms. 
B) growth firms. 
C) midcap firms. 
D) blend firms. 
E) none of the above.

Question 12

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

Accepted Answer

A) the statistical results used are almost always incorrect. 
B) the slope coefficient of the regression equation is biased downward. 
C) the slope coefficient of the regression equation is biased upward. 
D) the intercept of the regression equation is biased downward. 
E) the intercept of the regression equation is equal to the risk-free rate. 
A) the statistical results used are almost always incorrect. 
B) the slope coefficient of the regression equation is biased downward. 
C) the slope coefficient of the regression equation is biased upward. 
D) the intercept of the regression equation is biased downward. 
E) the intercept of the regression equation is equal to the risk-free rate.

Question 13

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

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

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.

Question 16

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 17

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) flatter than 
B) equal to 
C) steeper than 
D) one-half as much as 
E) none of the above 
A) flatter than 
B) equal to 
C) steeper than 
D) one-half as much as 
E) none of the above

Question 18

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 19

Fama and French (1992)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 the above 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 the above is true.

Question 20

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 the above 
A) trading costs 
B) ease of sale 
C) market depth 
D) necessary price concessions to effect a quick transaction 
E) all of the above

Exam 13: Empirical Evidence on Security Returns

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

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

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

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

Discuss Roll's critique of the CAPM.

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

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.

The CAPM is not testable unless

Fama and French (2002)studied the equity premium puzzle by breaking their sample into subperiods and found that

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

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

__________ 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 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.

Equity premium puzzle studies may be subject to survivorship bias because

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.

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.

Fama and French (1992)found that

Liquidity embodies several characteristics such as ________.

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

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