Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is:
I. Highly significant in predicting future stock returns
II. Relatively useless in predicting future stock returns
III. A good predictor of the firm's specific risk
A) I only
B) II only
C) I and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

Fama and French's research found that after controlling for firm size and the ratio of the firm's book value to market value, beta (a measure of market risk) is relatively useless in predicting future stock returns. This challenged the traditional Capital Asset Pricing Model (CAPM) which posits beta as a central determinant of expected return.

Fama and French Claim That After Controlling for Firm Size