Question Details

Fama-French model






 .	Which of the following statements is CORRECT?

a.	The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is about 0.6.
b.	The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.
c.	The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is also about 0.94.
d.	The typical R2 for a stock is about 0.6 and the typical R2 for a portfolio is also about 0.6.
e.	The typical R2 for a stock is about 0.3 and the typical R2 for a portfolio is also about 0.3.

	
 .	Which of the following statements is CORRECT?

a.	The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
b.	The slope of the characteristic line is the stock- standard deviation.
c.	The distance of the plot points from the characteristic line is a measure of the stock- market risk.
d.	The distance of the plot points from the characteristic line is a measure of the stock- diversifiable risk.
e.	“Characteristic line” is another name for the Security Market Line.

	
 .	Which of the following statements is CORRECT?

a.	Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
b.	Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.
c.	Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.
d.	The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.
e.	Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

 .	Which of the following are the factors for the Fama-French model?

a.	The excess market return, a debt factor, and a book-to-market factor.
b.	The excess market return, a size factor, and a debt.
c.	A debt factor, a size factor, and a book-to-market factor.
d.	The excess market return, an industrial production factor, and a book-to-market factor.
e.	The excess market return, a size factor, and a book-to-market factor.

Hard:


 .	Assume an economy in which there are three securities:  Stock A with rA = 10% and A = 10%; Stock B with rB = 15% and B = 20%; and a riskless asset with rRF = 7%.  Stocks A and B are uncorrelated (rAB = 0).  Which of the following statements is most CORRECT?

a.	The expected return on the investor- portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (SD) of approximately 10%.
b.	The expected return on the investor- portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (SD) that is between 10% and 20%.
c.	The investor- risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%.
d.	Since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.
e.	The expected return on the investor- portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (SD) of approximately 20%.





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