Which One of the Following Combinations Will Tend to Produce

question 87

Multiple Choice

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

• A)large market capitalization and high book-to-market ratio
• B)large market capitalization and low book-to-market ratio
• C)small market capitalization and high book-to-market ratio
• D)small market capitalization and a book-to-market ratio of 1.0
• E)small market capitalization and a low book-to-market ratio

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Definitions:

Treasury Stock

Shares that were issued and subsequently reacquired by the issuing company, reducing the amount of outstanding stock on the balance sheet.

Bonds Payable

A financial obligation represented by a bond issued by a company, promising to pay back with interest the borrowed funds.

Accounts Payable

The amount owed by a business to its suppliers or vendors for goods and services purchased on credit.

Accrual Basis

An accounting method that records income and expenses when they are earned or incurred, regardless of when cash is exchanged.