Chapter 13 Empirical Evidence on Security Returns Answer Key
Multiple Choice Questions
1.
The expected return/beta relationship is used
2.
The expected return/beta relationship is not used
3.
__________ 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.
4.
Fama and MacBeth (1973) found that the relationship between average excess returns
and betas was
5.
In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor (the factors)
that appeared to have significant explanatory power in explaining security returns was
(were)
6.
In the empirical study of a multifactor model by Chen, Roll, and Ross, a factor that did not
appear to have significant explanatory power in explaining security returns was
7.
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.
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.
9.
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 nonsystematic risk and ________ to its beta.
10.
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.
11.
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.
12.
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
13.
Given the results of the early studies by Lintner (1965) and Miller and Scholes (1972), one
would conclude that
14.
If a market proxy portfolio consistently beats all professionally managed portfolios on a
risk-adjusted basis, it may be concluded that
15.
In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that
__________ might be a proxy for systematic factors.
16.
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
17.
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.
18.
The research by Fama and French suggesting that CAPM is invalid has generated which of
the following responses?
19.
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
20.
Consider the regression equation:
ri
–
rf
=
g
0 +
g
1
b
1 +
g
2
s
2(
ei
) +
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
s
2(
ei
) = 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,
g
0, has to be
21.
Consider the regression equation:
ri
–
rf
=
g
0 +
g
1
bi
+
g
2
s
2(
ei
) +
eit
where:
ri
–
rt
= the average difference between the monthly return on stock i and the monthly risk-
free rate
bi
= the beta of stock i
s
2(
ei
) = 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,
g
1, to be
22.
Consider the regression equation:
ri
–
rf
=
g
0 +
g
1
bi
+
g
2
s
2(
ei
) +
eit
where:
ri
–
rt
= the average difference between the monthly return on stock i and the monthly risk-
free rate
bi
= the beta of stock
i
s
2(
ei
) = 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,
g
2, to be
23.
Consider the regression equation:
ri
–
rf
=
g
0 +
g
1
bi
+
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
24.
Benchmark error
25.
The CAPM is not testable unless