1) Which of the following statements is false?

A) If the market portfolio is efficient, then all securities and portfolios must plot on the SML, not just individual stocks.

B) For most stocks the standard errors of the alpha estimates are large, so it is impossible to conclude that the alphas are statistically different from zero.

C) It is not difficult to find individual stocks that, in the past, have not plotted on the SML.

D) Small stocks (those with lower market capitalization) have lower average returns.

Answer:

Explanation:

2) Stocks with lower market capitalizations have ________ average returns. This empirical result is called the size effect.

A) higher

B) lower

C) zero

D) weighted

Answer:

3) Which of the following statements is false?

A) The size effect is the observation that small stocks have positive alphas.

B) When considering portfolios formed based on the market-to-book ratio, most of the portfolios plot below the security market line.

C) The largest alphas occur in the smallest size deciles.

D) When considering portfolios formed based on size, although the portfolios with the higher betas yield higher returns, most size portfolios plot above the security market line.

Answer:

Explanation:

4) When the market portfolio is not efficient, theory predicts that stocks with ________ market capitalizations or ________ book-to-market ratios will have ________ alphas.

A) high; low; positive

B) low; high; negative

C) low; high; positive

D) high; high; negative

Answer:

5) Which of the following statements is false?

A) Portfolios with high market capitalizations will have positive alphas if the market portfolio is not efficient.

B) The size effect is the observation that firms with high book-to-market ratios have positive alphas.

C) If the market portfolio is not efficient, then a portfolio of high book-to-market stocks will likely have positive alphas.

D) Portfolios with low book-to-market ratios will have negative alphas if the market portfolio is not efficient.

Answer:

Explanation:

6) Which of the following statements is false?

A) A momentum strategy is one where you buy stocks that have had low past returns and (short) sell stocks that have had high past returns.

B) Over the years since the discovery of the CAPM, it has become increasingly clear to researchers and practitioners alike that by forming portfolios based on market capitalization, book-to-market ratios, and past returns, one can construct trading strategies that have positive alphas.

C) Portfolios containing firms with the highest realized returns over the previous six months tend to have positive alphas over the next six months.

D) If the market portfolio is not efficient, then a portfolio of small stocks will likely have positive alphas.

Answer:

Explanation: