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Exam 13: Empirical Evidence on Security Returns

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Question 21

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

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.

F) C) and D)
G) All of the above

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Question 22

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Consider the regression equation: r_i − r_f = g₀ + g₁b_i + g₂s²(e_i) + e_it Where: R_i − r_t = 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, g₁, to be

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.

F) C) and D)
G) None of the above

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Question 23

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

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

The Fama-French modelI) 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) is the reason that the premia are unsettled.V) is not a useful tool for benchmarking performance against a well-defined set of factors.

Kandel and Stambaugh (1995) expanded Roll's critique of the CAPM by arguing that tests rejecting a positive relationship between average return and beta are demonstrating

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

Which of the following factors will have a negative slope?

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

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

Which of the following would be required for tests of the multifactor CAPM and APT?

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

Early tests of the CAPM involved

Which of the following is NOT an addition to the Fama and French (1992) model.

__________ 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 estimated slope of the security market line was _______ what the CAPM would predict.

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.

In the results of the earliest estimations of the security market line 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 and ________ to its beta.

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

The liquidity of illiquid stocks with high liquidity betas that generate higher average returns is referred to as a(n) _____________.