A Study by Mehra and Prescott (1985) Found That Historical

question 34

Multiple Choice

A study by Mehra and Prescott (1985) found that historical average excess returns

• A)have been too small to be consistent with rational security pricing.
• B)have been too large to be consistent with rational security pricing.
• C)have been too small to be consistent with fractional security pricing.
• D)prove CAPM is incorrect.

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Definitions:

Decay Hypothesis

The theory that information is gradually forgotten over time due to the simple passage of time, assuming no attempt to retain it.

Rehearsal

The cognitive process of repeatedly practicing or reviewing information to aid in its retention in memory.

Central Executive

A component of working memory model that regulates the allocation of attention and the processing of information from the sensory system and long-term memory.

Working Memory

A mental framework designed to hold information in a temporary state, given its finite capacity, suitable for further processing.