Deck 11: Managing Bond Portfolios

Question 1

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

A) the monthly growth rate in industrial production might be a proxy
B) unexpected inflation might be a proxy
C) expected inflation might be a proxy
D) a and b
E) a,b,and c

Answer 1

E

Question 2

Kothari,Shanken and Sloan (1994)use annual intervals to estimate stock betas and find

A) the expected return-beta relationship is not statistically significant.
B) there has been substantial compensation for beta risk over the 1927-1941 period,but not since that time.
C) there has been substantial compensation for beta risk over the 1941-1990 period but not before that time.
D) there has been substantial compensation for beta risk over the 1941-1990 period and even more over the 1927-1990 period.
E) none of these.

Answer 2

D

Question 3

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

A) the inefficiency of the market proxy used in the tests.
B) that the relationship between average return and beta is not linear.
C) that the relationship between average return and beta is negative.
D) the need for a better way of explaining security returns.
E) none of these

Answer 3

A

Question 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 change in the expected rate of inflation
B) the risk premium on bonds
C) the unexpected change in the rate of inflation
D) industrial production
E) b,c and d

Question 5

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.

A) greater than
B) equal to
C) less than
D) unrelated to
E) more information is necessary to answer this question

Question 6

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

Question 7

Black,Jensen,and Scholes examined the validity of the simple version of the CAPM and the zero beta version of the CAPM.Their empirical results were

A) fully consistent with the simple version of the CAPM.
B) fully consistent with the zero beta version of the CAPM.
C) not fully consistent with either the simple version of the CAPM or the zero beta version of the CAPM,but were more consistent with the simple version of the CAPM.
D) not fully consistent with either the simple version of the CAPM or the zero beta version of the CAPM,but were more consistent with the zero beta version of the CAPM.
E) none of these.

Question 8

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.

A) positively related
B) negatively related
C) unrelated
D) inversely related
E) not proportional

Question 9

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,g₂ 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) none of these

Question 10

Fama and MacBeth found that the relationship between average excess returns and betas was ___________.

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 11

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.

Question 12

__________ 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.

A) Kim
B) Markowitz
C) Modigliani
D) Roll
E) none of these

Question 13

Consider the regression equation:
R_i - r_f = g₀ + g₁b_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.
This regression equation is used to estimate __________.

A) the security characteristic line
B) the security market line
C) the capital market line
D) a and b
E) a,b,and c

Question 14

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 these

Question 15

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

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 these

Question 16

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

A) the security characteristic line
B) the security market line
C) the capital market line
D) all of these
E) none of these

Question 17

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) 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 these

Question 18

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

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 19

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 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) none of these.

Question 20

The expected return/beta relationship is used ___________.

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 these
E) none of these

Question 21

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

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 these.

Question 22

Tests of multifactor models indicate

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 these is true.

Question 23

Fama and French (2000)studied the equity premium puzzle by breaking their sample into subperiods and found that

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 24

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.

Question 25

GARCH models use _________ as the information set used to form estimates of variance.

A) forecasts of market volatility
B) rate of return history
C) estimated future returns
D) beta coefficients
E) none of these

Question 26

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.

A) I,II,and III
B) I and III
C) I and II
D) II and III
E) IV

Question 27

Equity premium puzzle studies may be subject to survivorship bias because

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 28

In their multifactor model,Chen,Roll,and Ross found

A) that two market indexes,the equally weighted NYSE and the value weighted NYSE,were not significant predictors of security returns.
B) that the value weighted NYSE index had the incorrect sign,implying a negative market risk premium.
C) expected changes in inflation predicted security returns.
D) a and b.
E) a,b,and c.

Question 29

A study by Mehra and Prescott (1985)covered a period of ______ years and found that historical average excess returns _________.

A) 25,have been too small to be consistent with rational security pricing.
B) 25,have been too large to be consistent with rational security pricing.
C) 90,have been too small to be consistent with rational security pricing.
D) 90,have been too large to be consistent with rational security pricing.
E) 25,are consistent with rational security pricing.

Question 30

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

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 these is correct.

Question 31

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

A) value firms.
B) growth firms.
C) midcap firms.
D) blend firms.
E) None of these is correct.

Question 32

Fama and French,in their 1992 study,found that

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 these is true.

Question 33

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

A) the market beta is equal to 1.0.
B) non-systematic risk has significant explanatory power in estimating security returns.
C) The average return-beta relationship is highly significant.
D) The intercept in tests of the excess returns-beta relationship is exactly zero.
E) professional investors do not generally out-perform market indexes,demonstrating that the market is efficient.

Question 34

Benchmark error

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.

Question 35

Early tests of the CAPM involved

A) establishing sample data.
B) estimating the security characteristic line.
C) estimating the security market line.
D) all of these.
E) none of these.

Question 36

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

A) Specification of risk factors.
B) Identification of portfolios that hedge these fundamental risk factors.
C) Tests of the explanatory power and risk premiums of the hedge portfolios.
D) All of these are true.
E) None of these is true.

Question 37

The CAPM is not testable unless

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 38

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

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 39

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

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 these.

Question 40

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

A) I and II
B) II,and IV
C) II,and III
D) I,II,and IV
E) I,II,III,and IV

Question 41

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

A) the market rate of return does not help explain the rate of return of individual securities and CAPM must be rejected.
B) the market rate of return does explain the rate of return of individual securities.
C) the change in proprietary wealth helps explain the rate of return of individual securities.
D) the market rate of return does not help explain the rate of return of individual securities and CAPM must be rejected,and the change in proprietary wealth helps explain the rate of return of individual securities.
E) None of these is correct.

Question 42

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

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 these are correct.
E) None of these is correct.

Question 43

Jagannathan and Wang (2006)find that the CCAPM explains returns ______ the Fama-French 3-factor model and that the Fama-French 3-factor model explains returns ______ the traditional CAPM.

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 44

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

Question 45

Discuss Roll's critique of the CAPM.

Question 46

When portfolio performance is measured,what type of benchmark may be used? Explain what Roll meant by benchmark error.Draw a graph that shows how market proxies might produce betas that have no relation to expected returns.Briefly discuss the graph.

Question 47

Petkova and Zhang (2005)examine the relationship between beta and the market risk premium and find

A) a countercyclical beta.
B) the beta of the HML portfolio is negative in good economies and positive in bad economies.
C) a cyclical beta.
D) the beta of the HML portfolio is positive in good economies and negatives in bad economies.
E) a countercyclical beta and the beta of the HML portfolio is negative in good economies and positive in bad economies.

Question 48

Liquidity embodies several characteristics such as ________.

A) trading costs
B) ease of sale
C) market depth
D) necessary price concessions to effect a quick transaction
E) All of these are correct.

Question 49

Discuss the Black Jensen Scholes (BJS)study of the zero-beta version of the CAPM.

Question 50

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.

A) I only.
B) V only.
C) I and II.
D) I and IV.
E) II and V.

Question 51

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).