"411 02-2310_Individual Investors_lect-1

"411 02-2310_Individual Investors_lect-1 - Testing...

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Unformatted text preview: Testing the Capital Asset Pricing Model (CAPM) Individual Investor Behavior Readings: BKM chapter 7 11 Lecture 4: Testing Asset Pricing Models Review 22 In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line? A. The capital market line always has a positive slope B. The capital market line is also called the security market line C. The capital market line is the best attainable capital allocation line D. The capital market line is the line from the risk-free rate through the market portfolio Review 33 According to the capital asset pricing model, _________. A. all securities' returns must lie on the capital market line B. all securities' returns must lie on the security market line C. the slope of the security market line must be less than the market risk premium D. any security with a beta of 1 must have an excess return of zero Review 44 Imagine a world where the CAPM holds. The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should _________. A. buy stock X because it is overpriced B. buy stock X because it is underpriced C. sell short stock X because it is overpriced D. sell short stock X because it is underpriced Testing CAPM Fama+French (1996):- 25 portfolios based on market capitalization and book-to- market ratio: average alpha = 0.29%, reject the null- 25 portfolios based on E/P: average alpha = 0.26%, reject the null e Fairly confident that & p is different from zero 55 Testing CAPM Fama+French (2004): e& p not correlated with average portfolio returns 66 Testing...
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"411 02-2310_Individual Investors_lect-1 - Testing...

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