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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Empirical Evidence on Security Returns

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	The expected return/beta relationship is used
		A)	to rate the performance of portfolio managers
		B)	in court rulings to determine discount rates to evaluate claims of lost future incomes
		C)	by regulatory commissions in determining the costs of capital for regulated firms
		D)	all of the above
		E)	none of the above


2	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)	industrial production
		B)	the unexpected change in the rate of inflation
		C)	the risk premium on corporate bonds
		D)	all of the above
		E)	none of the above


3	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)	either the CAPM is invalid or the proxy is inadequate
		B)	the proxy is inadequate
		C)	the CAPM is invalid
		D)	the CAPM is valid and the proxy is adequate
		E)	none of the above


4	If a market proxy portfolio consistently beats all professionally managed portfolios on a risk-adjusted basis, it may be concluded that
		A)	a. the CAPM is valid
		B)	b. the CAPM is invalid
		C)	c. the market proxy is mean/variance efficient
		D)	a. and c.
		E)	b. and c.


5	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)	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.
		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)	fully consistent with the zero beta version of the CAPM.
		E)	none of the above.


6	The research by Fama and French suggesting that CAPM is invalid has generated which of the following responses?
		A)	Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered.
		B)	Estimates of asset betas need to be improved.
		C)	Better econometrics should be used in the test procedure.
		D)	The single-index model needs to account for non-traded assets and the cyclical behavior of asset betas.
		E)	All of the above


7	Benchmark error
		A)	can result in inconclusive tests of the CAPM.
		B)	refers to the use of an incorrect market proxy in tests of the CAPM.
		C)	can result in incorrect evaluation measures for portfolio managers.
		D)	all of the above
		E)	none of the above


8	According to Roll, the only testable hypothesis associated with the CAPM is
		A)	whether the market portfolio is mean-variance efficient.
		B)	the exact composition of the market portfolio.
		C)	the number of ex post mean-variance efficient portfolios.
		D)	the SML relationship.
		E)	none of the above.


9	Which of the following deficiencies of the CAPM were addressed by Jagannathan and Wang?
		A)	a. nontraded assets like human capital.
		B)	b. cyclical asset betas
		C)	c. stock prices following random walks.
		D)	a. and b.
		E)	b. and c.


10	Which of the following is (are) a result(s) of the Fama and French (2000) study of the equity premium puzzle? I) The statistical precision of average historical returns is far higher than the precision of estimates from the dividend-discount model (DDM). II) The reward-to-variability ratio (Sharpe) ratio derived from the DDM is far more stable than that derived from realized returns. III) Average realized returns during 1950-1999 exceeded the internal rate of return (IRR) for corporate investments. 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 only

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