A. Evaluating the CAPM Which one of the following statements implied by the CAPM is not true?

Systematic risk is the risk that matters.

Investors should diversify.

A similar well diversified portfolio will be suitable for a wide range of investors

All investors hold the market portfolio of risky assets.

B.

Fama-French Model Work by Eugene Fama and Kenneth French indicates that stock returns are a function of three factors. Which of the following are the factors they propose?

I. The market index excess return

II. The ratio of the book value of equity to the market value of equity

III. The difference in returns between small and large firms

IV. Volume of trading

V. The number of institutions holding the stock

II, III and V

I, II and III

II, III and V

I, III and IV

C.

Arbitrage Pricing Factors The Chen, Roll and Ross (1986) study suggests that systematic factors of a portfolio's returns may include changes in all but which one of the following?

industrial production

default spreads

yield curve

individual company sales growth