Question

5.2 points) According to the capital asset pricing model, a fairly priced security will plot above the security market line b along the security market line c. below the security market line d at no relation to the security market line 6. (3 points) Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? L. Book-to-market ratio 11. Unexpected change in industrial production TIL. Fimm size a. I only b. I and II only c.land III only d. L. II, and THE

Answer 1

5. The correct answer to the question is (b) 'along the security market line'. Under the CAPM model, a security plotted above the security market line is regarded as expensive, while a security plotted below the security market line is regarded as cheap or undervalued. However, on the other hand, if a security is plotted along the security market line, then the same is considered as fairly valued.

6. The correct answer is (a). 'I only'. As per 5 factor model of Fama and French, Book to market ratio is a better indicator of stock's return than beta. A book to market ratio indicates the premium valuation given to a stock price by market as compared to its value in books.