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:

Expected Return

Expected return is the forecasted financial return on an investment, reflecting the amount of profit or loss one anticipates on an investment.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, used to quantify the risk of an investment.

Expected Return

The weighted average of all possible returns from an investment, considering the probabilities of each outcome.

Efficient Market Hypothesis

The theory that asset prices fully reflect all available information, making it impossible to consistently achieve higher returns than the overall market.