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1、Chapter 13 Empirical Evidence on Security Returns Multiple Choice Questions1.The expected return/beta relationship is used _. A)by regulatory commissions in determining the costs of capital for regulated firms B)in court rulings to determine discount rates to evaluate claims of lost future incomes C
2、)to advise clients as to the composition of their portfolios D)all of the above E)none of the above Answer: D Difficulty: Easy Rationale: The risk/return relationship is appropriate for all of the uses cited above.2._ argued in his famous critique that tests of the expected return/beta relationship
3、are invalid and that it is doubtful that the CAPM can ever be tested. A)Kim B)Markowitz C)Modigliani D)Roll E)none of the above Answer: D Difficulty: Easy Rationale: These arguments were made by Richard Roll in his famous critique of the CAPM, resulting the Institutional Investor article, Is Beta De
4、ad?3.Fama and MacBeth (1973) found that the relationship between average excess returns and betas was _. A)linear B)nonexistent C)as expected, based on earlier studies D)Fama and MacBeth did not examine the relationship between excess returns and beta E)A and C Answer: E Difficulty: Moderate Rationa
5、le: The Fama and MacBeth study validated earlier studies of the excess returns/beta relationship.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_. A)the change in the expected ra
6、te of inflation B)the risk premium on bonds C)the unexpected change in the rate of inflation D)industrial production E)B, C and D Answer: E Difficulty: Difficult Rationale: Of the variables tested, Chen, Roll, and Ross found that B, C, and D were significant predictors of security returns.5.In the r
7、esults 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 stocks return and the risk-free rate was _ to its nonsystematic risk. A)positively related B)negatively related C)unrelated D)related
8、in a nonlinear fashion E)none of the above Answer: A Difficulty: Moderate Rationale: These results were surprising, as it was expected that systematic, not nonsystematic, risk would be positively related to stock returns.6.In the results of the earliest estimations of the security market line by Lin
9、tner (1965) and Scholes (1972), it was found that the average difference between a stocks return and the risk-free rate was _ to its beta. A)positively related B)negatively related C)unrelated D)inversely related E)not proportional Answer: A Difficulty: Moderate Rationale: These results are consiste
10、nt with the CAPM.7.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. A)higher than B)equal to C)less than D)twice as much as E)more information is required to answer this question Answer: C Di
11、fficulty: Moderate Rationale: These studies found that the SML was too flat, compared to CAPM predictions by a statistically significant margin.8.If a professionally managed portfolio consistently outperforms the market proxy on a risk-adjusted basis and the market is efficient, it should be conclud
12、ed that _. A)the CAPM is invalid B)the proxy is inadequate C)either the CAPM is invalid or the proxy is inadequate D)the CAPM is valid and the proxy is adequate E)none of the above Answer: C Difficulty: Moderate Rationale: C is true; however, unfortunately, one cannot conclude which one (or both) is
13、 the problem.9.Given the results of the early studies by Lintner (1965) and Miller and Scholes (1972), one would conclude that A)high beta stocks tend to outperform the predictions of the CAPM. B)low beta stocks tend to outperform the predictions of the CAPM. C)there is no relationship between beta
14、and the predictions of the CAPM. D)A and B. E)none of the above. Answer: B Difficulty: Moderate Rationale: The results of these studies are exactly the opposite of what one would expect.10.If a market proxy portfolio consistently beats all professionally managed portfolios on a risk-adjusted basis,
15、it may be concluded that A)the CAPM is valid. B)the market proxy is mean/variance efficient. C)the CAPM is invalid. D)A and B. E)B and C. Answer: D Difficulty: Moderate Rationale: If such results were obtained consistently, one could be assured that the model is valid and that the market proxy is me
16、an/variance efficient.11.In developing their test of a multifactor model, Chen, Roll, and Ross hypothesized that _ for systematic factors. A)the monthly growth rate in industrial production might be a proxy B)unexpected inflation might be a proxy C)expected inflation might be a proxy D)A and B E)A,
17、B, and C Answer: E Difficulty: Moderate Rationale: In their model, Chen, Roll, and Ross hypothesized that A, B, and C might be proxies for systematic risk. However, of the above factors, only A and B appeared to have significant explanatory power.12.Black, Jensen, and Scholes examined the validity o
18、f 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)fully 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 v
19、ersion of the CAPM, but were more consistent with the simple version of the CAPM. D)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. E)none of the above. Answer: D Difficulty: Modera
20、te Rationale: D is the most accurate statement regarding these findings.13.Kandel and Stambaugh (1995) expanded Rolls critique of the CAPM by arguing that tests rejecting a positive relationship between average return and beta are demonstrating A)the inefficiency of the market proxy used in the test
21、s. B)that the relationship between average return and beta is not linear. C)that the relationship between average return and beta is negative. D)the need for a better way of explaining security returns. E)none of the above Answer: A Difficulty: Moderate Rationale: These results are typical of the re
22、sults of similar studies.14.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. A)greater than B)equal to C)less than D)unrelated to E)more information is necessary to an
23、swer this question Answer: C Difficulty: Moderate Rationale: These results are inconsistent with what would be predicted with the CAPM.15.The research by Fama and French suggesting that CAPM is invalid has generated which of the following responses? A)Better econometrics should be used in the test p
24、rocedure. B)Estimates of asset betas need to be improved. C)Theoretical sources and implications of research that contradicts CAPM needs to be reconsidered. D)The single-index model needs to account for non-traded assets and the cyclical behavior of asset betas. E)All of the above Answer: E Difficul
25、ty: Moderate Rationale: All four responses have been given in the literature responding to the Fama-French critique.16.Consider the regression equation:rit - rft = ai + bi(rmt - rft) + eitwhere:rit = return on stock i in month trft = the monthly risk-free rate of return in month trmt = the return on
26、 the market portfolio proxy in month tThis regression equation is used to estimate A)the security characteristic line. B)the security market line. C)the capital market line. D)all of the above. E)none of the above. Answer: A Difficulty: Moderate Rationale: The security characteristic line is a graph
27、ical depiction of the excess returns on the security as a function of the excess returns on the market.17.Consider the regression equation:ri - rf = g0 +g1b1 + g2s2(ei) + eitwhere:ri - rf = the average difference between the monthly return on stock i and the monthly risk-free ratebi = the beta of st
28、ock is2(ei) = a measure of the nonsystematic variance of the stock iIf you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient g0 to be A)0. B)1. C)equal to the risk-free rate of return. D)equal to the average difference between the monthly return on
29、 the market portfolio and the monthly risk-free rate. E)none of the above. Answer: A Difficulty: Moderate Rationale: In this model, the coefficient, g0 represents the excess return of the security, which would be zero if the CAPM held.18.Consider the regression equation:ri - rf = g0 + g1bi + g2s2(ei
30、) + eitwhere:ri - rt = the average difference between the monthly return on stock i and the monthly risk-free ratebi = the beta of stock is2(ei) = a measure of the nonsystematic variance of the stock iIf you estimated this regression equation and the CAPM was valid, you would expect the estimated co
31、efficient, g1 to be A)0 B)1 C)equal to the risk-free rate of return. D)equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate. E)equal to the average monthly return on the market portfolio. Answer: D Difficulty: Moderate Rationale: The varia
32、ble measured by the coefficient g1 in this model is the market risk premium.19.Consider the regression equation:ri - rf = g0 + g1bi + g2s2(ei) + eitwhere:ri - rt = the average difference between the monthly return on stock i and the monthly risk-free ratebi = the beta of stock is2(ei) = a measure of
33、 the nonsystematic variance of the stock iIf you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g2 to be A)0 B)1 C)equal to the risk-free rate of return D)equal to the average difference between the monthly return on the market portfolio and th
34、e monthly risk-free rate E)none of the above Answer: A Difficulty: Moderate Rationale: If the CAPM is valid, the excess return on the stock is predicted by the systematic risk of the stock and the excess return on the market, not by the nonsystematic risk of the stock.20.Consider the regression equa
35、tion:ri - rf = g0 + g1bi + eitwhere:ri - rf = the average difference between the monthly return on stock i and the monthly risk-free ratebi = the beta of stock iThis regression equation is used to estimate _. A)the security characteristic line B)the security market line C)the capital market line D)A
36、 and B E)A, B, and C Answer: B Difficulty: Moderate Rationale: The security market line is a graphical depiction of the excess returns on the security and a function of the beta of the security.21.Benchmark error A)refers to the use of an incorrect market proxy in tests of the CAPM. B)can result in
37、inconclusive tests of the CAPM. C)can result in incorrect evaluation measures for portfolio managers. D)A and B. E)A, B, and C. Answer: E Difficulty: Easy Rationale: If an incorrect market proxy is used, A, B, and C can result.22.The CAPM is not testable unless A)the exact composition of the true ma
38、rket portfolio is known and used in the tests. B)all individual assets are included in the market proxy. C)the market proxy and the true market portfolio are highly negatively correlated. D)A and B. E)B and C. Answer: D Difficulty: Easy Rationale: A and B must be true for the CAPM to be tested; howe
39、ver, the exact composition of the true market portfolio cannot be known, thus the CAPM probably can never be tested.23.In their multifactor model, Chen, Roll, and Ross found A)that two market indexes, the equally weighted NYSE and the value weighted NYSE, were not significant predictors of security
40、returns. B)that the value weighted NYSE index had the incorrect sign, implying a negative market risk premium. C)expected changes in inflation predicted security returns. D)A and B. E)A, B, and C. Answer: D Difficulty: Moderate Rationale: A, B, and unexpected changes in inflation were significant pr
41、edictors of security returns.24.GARCH models use _ as the information set used to form estimates of variance. A)forecasts of market volatility B)rate of return history C)estimated future returns D)beta coefficients E)none of the above Answer: B Difficulty: Moderate Rationale: In a GARCH model, rate
42、of return history is used to update estimates of market variance.25.Early tests of the CAPM involved A)establishing sample data. B)estimating the security characteristic line. C)estimating the security market line. D)all of the above. E)none of the above. Answer: D Difficulty: Easy Rationale: These
43、three basic steps, establishing sample data, estimating security characteristic lines and estimating the security market line, were all necessary to test the implications of the CAPM.26.According to Roll, the only testable hypothesis associated with the CAPM is A)the number of ex post mean-variance
44、efficient portfolios. B)The exact composition of the market portfolio. C)whether the market portfolio is mean-variance efficient. D)the SML relationship. E)none of the above. Answer: C Difficulty: Easy Rationale: According to Roll, the only testable hypothesis about the CAPM is that the market portf
45、olio is mean-variance efficient.27.One way that Black, Jensen and Scholes overcame the problem of measurement error was to: A)group securities into portfolios. B)use a two-stage regression methodology. C)reduce the precision of beta estimates. D)Set alpha equal to one. E)None of the above. Answer: A Difficulty: Moderate Rationale: Black, Jensen and Scholes, in their landmark study, found that grouping securities into well-diversified portfolios significantly reduced measurement error.28.Stronge