Question 1

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

Accepted Answer

Chen, Roll, and Ross hypothesized that the monthly growth rate in industrial production, unexpected inflation, and expected inflation might all serve as proxies for systematic factors in their multifactor model.

Question 2

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

Accepted Answer

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

Accepted Answer

Kandel and Stambaugh (1995) argued that the rejection of a positive relationship between average return and beta often indicates that the market proxy used in the tests is inefficient, rather than disproving the CAPM itself.

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

Accepted Answer

According to the statement, "a factor that appeared to have significant explanatory power in explaining security returns was", we can eliminate option B (risk premium on bonds) because it mentions a risk premium on a single asset class, not a multi-factor model. Additionally, option A only includes the change in the expected rate of inflation, while option C only includes the unexpected change in the rate of inflation. These are both important factors but do not cover everything. Option D (industrial production) is important, but it is not the only factor. Therefore, the best choice is E, as it includes all three factors listed (the change in the expected rate of inflation, the unexpected change in the rate of inflation, and industrial production) and encompasses a more comprehensive multi-factor model.

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.

Accepted Answer

The study found that the risk-adjusted returns of high beta portfolios were less than the risk-adjusted returns of low beta portfolios.

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.

Accepted Answer

The study found that the estimated slope of the security market line was less than what the CAPM would predict.

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

Accepted Answer

Black, Jensen, and Scholes found that the empirical results were not fully consistent with either version of the CAPM, but they were more consistent with the zero beta version of the CAPM.

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.

Accepted Answer

Lintner and Scholes found that the average difference between a stock's return and the risk-free rate (i.e. market risk premium) was positively related to its beta. This means that stocks with higher betas had higher average returns than stocks with lower betas, indicating that investors were being compensated for taking on more systematic risk.

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

Accepted Answer

According to the CAPM, the expected return on a security or portfolio should be proportional to its beta, which represents the systematic risk of the security or portfolio. Therefore, the coefficient on the beta, g_i, should be positive and nonzero in the regression equation. On the other hand, the coefficient on the nonsystematic variance, g₂s²(e_i), should be zero, because nonsystematic variance is diversified away in a well-diversified portfolio. Therefore, the best choice is A) 0.

Question 10

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

Accepted Answer

Fama and MacBeth found a relationship between average excess returns and betas, and this relationship was consistent with earlier studies that suggested a linear relationship between the two variables. Therefore, options A and C are both correct. Option D can be eliminated as Fama and MacBeth did examine the relationship. Option B is incorrect as the study did find a relationship between excess returns and beta.

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

Accepted Answer

The CAPM states that the expected return on a stock is equal to the risk-free rate plus a risk premium that is proportional to the stock's beta. In the regression equation given, the coefficient g1 represents the risk premium per unit of beta. If the CAPM is valid, then we would expect g1 to be equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate.

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.

Accepted Answer

Roll 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. The other options either did not criticize the CAPM or are not relevant to this question.

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 __________.

Accepted Answer

The answer of Consider the regression equation: R_i - r_f =...

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.

Accepted Answer

Both Lintner (1965) and Miller and Scholes (1972) found that the average difference between a stock's return and the risk-free rate was positively related to its nonsystematic risk, meaning that as the nonsystematic risk increased, so did the difference between a stock's return and the risk-free rate. This relationship is consistent with the idea of the security market line, where the expected return on a stock is a function of its systematic risk (beta) and the market risk premium (the difference between the expected return on the market and the risk-free rate). The nonsystematic risk is diversifiable and therefore does not affect the expected return on a stock.

Question 15

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

Accepted Answer

Early studies by Lintner and Miller and Scholes found that low beta stocks tend to have higher returns than predicted by the CAPM, suggesting they outperform the model's predictions.

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

Accepted Answer

The regression equation given is used to estimate the security characteristic line, which shows the relationship between a security's returns and the returns of the market portfolio proxy over time. It is not used to estimate the security market line or the capital market line.

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 _______________.

Accepted Answer

If a portfolio consistently outperforms the market on a risk-adjusted basis in an efficient market, it suggests that either the CAPM is not accurately capturing risk or the market proxy used is not adequate.

Question 18

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

Accepted Answer

The market proxy portfolio is mean/variance efficient and the CAPM is invalid.

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

Accepted Answer

If the CAPM is valid, the expected return for any stock should be equal to the risk-free rate plus a premium based on the stock's beta. Therefore, the coefficient for the constant term (g₀) should be equal to the risk-free rate. Any deviation from this would suggest that the CAPM is not valid. In this equation, if g₀ is not equal to 0, it would suggest that the constant term is not equal to the risk-free rate, indicating a violation of the CAPM. Therefore, the best choice is A) 0.

Question 20

The expected return/beta relationship is used ___________.

Accepted Answer

The expected return/beta relationship is used by regulatory commissions in determining the costs of capital for regulated firms, in court rulings to determine discount rates to evaluate claims of lost future incomes, and to advise clients as to the composition of their portfolios. Therefore, all of these options are correct.

Quiz 11: Managing Bond Portfolios

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

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

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

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 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.

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.

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

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.

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

__________ 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.

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 __________.

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.

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

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

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 _______________.

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

The expected return/beta relationship is used ___________.

Quiz 11: Managing Bond Portfolios

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

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

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

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 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.

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.

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

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.

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

__________ 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.

Consider the regression equation: Ri - rf = g0 + g1bi + 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. This regression equation is used to estimate __________.

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.

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

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

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 _______________.

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

The expected return/beta relationship is used ___________.

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 __________.

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