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| 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. |
| | A) | higher than |
| | B) | equal to |
| | C) | less than |
| | D) | twice as much as |
| | E) | more information is required to answer this question |
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| 2 | |
Which of the following statements is true about models that attempt to measure the empirical performance of the CAPM? |
| | 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. |
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| 3 | |
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. |
| | A) | positively related |
| | B) | negatively related |
| | C) | unrelated |
| | D) | related in a nonlinear fashion |
| | E) | none of the above |
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| 4 | |
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 |
| | A) | the unexpected change in the rate of inflation. |
| | B) | the risk premium on corporate bonds. |
| | C) | industrial production. |
| | D) | the expected change in the rate of inflation. |
| | E) | A, B, and C. |
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| 5 | |
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 |
| | A) | either the CAPM is invalid or the proxy is inadequate. |
| | B) | the proxy is inadequate. |
| | C) | the CAPM is invalid. |
| | D) | the CAPM is valid and the proxy is adequate. |
| | E) | none of the above |
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| 6 | |
The research by Fama and French suggesting that CAPM is invalid has generated which of the following responses? |
| | A) | Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered. |
| | B) | Estimates of asset betas need to be improved. |
| | C) | Better econometrics should be used in the test procedure. |
| | D) | The single-index model needs to account for non-traded assets and the cyclical behavior of asset betas. |
| | E) | All of the above |
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| 7 | |
According to Roll, the only testable hypothesis associated with the CAPM is |
| | A) | whether the market portfolio is mean-variance efficient. |
| | B) | the exact composition of the market portfolio. |
| | C) | the number of ex post mean-variance efficient portfolios. |
| | D) | the SML relationship. |
| | E) | none of the above |
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| 8 | |
Strongest evidence in support of the CAPM has come from demonstrating that |
| | A) | the average return-beta relationship is highly significant. |
| | B) | non-systematic risk has significant explanatory power in estimating security returns. |
| | C) | professional investors do not generally out-perform market indexes, demonstrating that the market is efficient. |
| | D) | the intercept in tests of the excess returns-beta relationship is exactly zero. |
| | E) | the market beta is equal to 1.0. |
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| 9 | |
Which of the following is (are) a result(s) of the Fama and French (2002) study of the equity premium puzzle?- The statistical precision of average historical returns is far higher than the precision of estimates from the dividend-discount model (DDM).
- The reward-to-variability ratio (Sharpe) ratio derived from the DDM is far more stable than that derived from realized returns.
- Average realized returns during 1950-1999 exceeded the internal rate of return (IRR) for corporate investments.
- There is no difference between DDM estimates and actual returns with regard to IRR, statistical precision, or the Sharpe measure.
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| | A) | I, II, and III |
| | B) | I and III |
| | C) | I and II |
| | D) | II and III |
| | E) | IV |
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| 10 | |
An extension of the Fama-French three-factor model includes a fourth factor to measure ________. |
| | A) | default spread |
| | B) | term spread |
| | C) | momentum |
| | D) | industrial production |
| | E) | inflation |
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