Assume That You Are Embarking on a Test of the Small-Firm

question 5

Multiple Choice

Assume that you are embarking on a test of the small-firm effect using APT.You form 10 size-based portfolios.The following finding would suggest there is evidence supporting APT:

• A) The top five size based portfolios should have excess returns that exceed the bottom five size based portfolios.
• B) The bottom five size based portfolios should have excess returns that exceed the top five size based portfolios.
• C) The ten portfolios must have excess returns not significantly different from zero.
• D) The ten portfolios must have excess returns significantly different from zero.
• E) None of the above.

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Definitions:

Residual Standard Deviation

A measure of the amount of variance in a dataset not explained by the predictive variables, often used in regression analysis.

Total Abnormal Return

The sum of the differences between the expected return on a security, based on a model like the CAPM, and the actual return over a specific period.

Bogey Portfolio

A benchmark portfolio against which the performance of an investment portfolio can be measured.

Bonds

Financial instruments representing loans made by an investor to a borrower, typically corporate or governmental, which are expected to be paid back with interest.