8. Tests of the CAPM The CAPM is one of the most extensively tested models in finance. The following statements describe the assumptions, methods, and findings of several of these studies. Based on your understanding of these issues, which of the following statements are true? Check all that apply. Alternative measures of (1) the market return (TM), (2) the risk-free rate (TRF), and (3) betas, as well as the time period of the data used, will not affect the estimated security or portfolio returns generated using the CAPM. Two important hypotheses addressed in tests of the CAPM and SML are that (1) a linear relationship exists between the required return on a security and its beta and (2) the required return of a stock or portfolio exhibiting a beta of 1.0 should equal the required market return (TM). Most tests of the CAPM have used portfolios of securities rather than individual stocks, due to the instability of the betas of individual securities. In an examination of whether the betas of individual securities remained stable over time, Levy (1971) found that the past betas of individual stocks are unstable and therefore are not good indicators of a company's future risk. Read the following information that addresses the empirical tests that have been conducted on the CAPM and determine whether the information is accurate: The CAPM hypothesizes that only market-specific risk should be positively related to security returns, because company-specific risk should not exist in a well-diversified portfolio. Test results, however, indicate that both exist and are relevant to the returns generated by the tested portfolios. Is this information accurate? O Yes No