Reference no: EM131625367

The Capital Asset Pricing Model (CAPM) is one of the most extensively tested models in finance. The following statements describe the assumptions, methods, and findings of several fo these studies. Based on your understanding of these issues, which of the following statements are true? Check all that apply:

A) Many studies of the CAPM have used (1) daily or monthly historical returns of the stocks and (2) the rate on both the 30-day US Treasury bill and the long-term US Treasury bond to estimate the risk-free rate (rRF)

B) Given it's assumptions, the CAPM has greater value as a predictive model than as a conceptual framework for the evaluation of risks and returns

C) 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 (rRF) and (2) the required return on a stock or portfolio exhibiting a beta of 1.0 should equal the required market return (rM)

D) In an examination of whether the betas 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

E) In theory, the CAPM should be applied to only stocks and not to other types of financial assets

Select the answers above that apply.

The many tests of the CAPM have concluded that the model is extremely useful in using ex post data to calculate true ex ante required returns. Is this statement accurate? Yes or No.