In One of Their Empirical Tests of the APT, Roll

question 148

Multiple Choice

In one of their empirical tests of the APT, Roll and Ross examined the relationship between a security's returns and its own standard deviation. A finding of a statistically significant relationship would indicate that

• A) APT is valid because a security's unsystematic component would be eliminated by diversification.
• B) APT is valid because non-diversifiable components should be explained by factor sensitivities.
• C) APT is invalid because a security's unsystematic component would be eliminated by diversification.
• D) APT is invalid because standard deviation is not an appropriate factor.
• E) None of these are correct.

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Definitions:

Self-Awareness

The conscious knowledge of one's own character, feelings, motives, and desires.

Heuristics

Mental shortcuts or rules of thumb that simplify decision-making processes but do not guarantee optimal or accurate solutions.

Insight

The capacity to gain an accurate and deep understanding of someone or something, often leading to problem-solving or creative thinking.

Algorithms

Step-by-step procedures or formulas for solving a problem or accomplishing a task, often used in computer programming and mathematics.