Chap013 - Chapter 13 Empirical Evidence on Security Returns...

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Chapter 13 Empirical Evidence on Security Returns Multiple Choice Questions 1. 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) 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 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 in the Institutional Investor article, "Is Beta Dead?" 3. Fama and MacBeth 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 Rationale: The Fama and MacBeth study validated earlier studies of the excess returns/beta relationship. Bodie, Investments, Sixth Edition 1
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Chapter 13 Empirical Evidence on Security Returns 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 rate 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 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. A) positively related B) negatively related C) unrelated D) related 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 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. A) positively related
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Chap013 - Chapter 13 Empirical Evidence on Security Returns...

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