Asked by Shannon Forbes on May 01, 2024
Verified
Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is:
I. Highly significant in predicting future stock returns
II. Relatively useless in predicting future stock returns
III. A good predictor of the firm's specific risk
A) I only
B) II only
C) I and III only
D) I, II, and III
Beta
A measure of a stock or portfolio's volatility in relation to the overall market, indicating its relative risk.
Firm Size
A measure of a company's scale or magnitude, often based on metrics such as revenue, assets, or number of employees.
Book Value
The net value of a company's assets minus its liabilities, often used to assess the company's worth on its balance sheet.
- Elucidate the practical utility and boundaries of CAPM within the context of financial decision-making processes.
Verified Answer
DC
Diana CarreiroMay 06, 2024
Final Answer :
B
Explanation :
Fama and French's research found that after controlling for firm size and the ratio of the firm's book value to market value, beta (a measure of market risk) is relatively useless in predicting future stock returns. This challenged the traditional Capital Asset Pricing Model (CAPM) which posits beta as a central determinant of expected return.
Learning Objectives
- Elucidate the practical utility and boundaries of CAPM within the context of financial decision-making processes.