Asked by Katelyn Tilden on May 07, 2024
Verified
In his famous critique of the CAPM, Roll argued that the CAPM ________.
A) is not testable because the true market portfolio can never be observed
B) is of limited use because systematic risk can never be entirely eliminated
C) should be replaced by the APT
D) should be replaced by the Fama-French three-factor model
Roll's Critique
A theoretical argument suggesting that it is impossible to create a truly diversified market portfolio due to the vast number of assets in existence.
CAPM
Capital Asset Pricing Model, a formula used to determine the expected return on an investment based on its risk relative to the overall market.
True Market Portfolio
A theoretical bundle of all possible investments that are weighted by market value.
- Understand the critiques and alternatives to the CAPM, including multi-factor models.
Verified Answer
DP
Dhruval PatelMay 10, 2024
Final Answer :
A
Explanation :
Roll's critique of the Capital Asset Pricing Model (CAPM) is that it is not testable in a true sense because the actual market portfolio, which should include all assets in the world (not just traded financial assets but also things like human capital and real estate), can never be fully observed or replicated.
Learning Objectives
- Understand the critiques and alternatives to the CAPM, including multi-factor models.