5a. Which of the following statements is false?

A) Many practitioners prefer to use average industry betas rather than individual stock betas.

B) When estimating beta by using past returns it is best to use the longest time horizon of returns available.

C) The CAPM predicts that a security's expected return depends on its beta with regard to the market portfolio of all risky investments available to investors.

D) If we use too short a time horizon when estimating beta, our estimate of beta will be unreliable.

5b. Which of the following statements is false?

A) We should be suspicious of beta estimates that are extreme relative to industry norms.

B) When using historical data, there is always the possibility of estimation error.

C) Evidence suggests that betas tend to revert toward zero over time.

D) For stocks, common practice is to use at least two years of weekly return data or five years of monthly return data when estimating beta.

5c. Which of the following statements is false?

A) The CAPM remains the predominant model used in practice to determine the equity cost of capital.

B) Low beta stocks have tended to perform somewhat better than the CAPM predicts.

C) The empirically estimated security market line is somewhat steeper than that predicted by the CAPM.

D) Some evidence suggests that the market risk premium has declined over time.

5d. Which of the following statements is false?

A) The imperfections in the CAPM may be critical in the context of capital budgeting and corporate finance, where errors in estimating the cost of capital are likely to be far more important than small discrepancies in the project cash flows.

B) To estimate the expected market risk premium we can look at the historical average excess return of the market over the risk-free interest rate.

C) The highest beta stocks have tended to underperform what the CAPM predicts.

D) Given an assessment of an index's future cash flows, we can estimate the expected return of the market by solving for the discount rate that is consistent with the current level of the index.