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. In theory, the CAPM should be applied to only stocks and not to other types of financial assets. Most tests of the CAPM have used portfolios of securities rather than individual stocks, due to the instability of the betas of individual securities. Two important hypotheses addressed in tests of the CAPM and SML are that (1) the intercept on the vertical axis should equal the risk-free rate (PRF) and (2) the required return on a stock or portfolio exhibiting a beta of 1.0 should equal the required market return (rm). In an examination of whether the betas of portfolios of 10 or more randomly selected stocks are stable over time, Levy (1971) found that the betas of these portfolios are relatively stable, so historical betas are good estimators of future portfolio volatility. Read the following information that addresses the empirical tests that have been conducted on the CAPM and determine whether the information is accurate: One of the two major groups of empirical studies undertaken to assess the validity of the CAPM addressed the stability of the risk-free rate of return (or the vertical intercept term in the SML). Is this information accurate? o No o Yes