When the market portfolio is not efficient,theory predicts that stocks with ________ market capitalizations or ________ book-to-market ratios will have ________ alphas.

Question

Quizplus · Accepted Answer

When the market portfolio is not efficient, a factor model can be used to determine the expected return of an individual stock. The Fama-French three-factor model includes market capitalization and book-to-market ratio as factors that can explain stock returns. According to the model, stocks with low market capitalizations and high book-to-market ratios tend to have higher alphas, indicating that they outperform the market portfolio. Therefore, the correct choice is C.

When the Market Portfolio Is Not Efficient,theory Predicts That Stocks