In One of Their Empirical Tests of the APT, Roll

question 3

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 the above.

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Definitions:

Right Hemisphere

The half of the brain that is typically associated with processing visual-spatial information, facial recognition, and certain aspects of language comprehension and emotion.

Left Hemisphere

The left side of the human brain, often associated with analytical thought, logic, language, and mathematical processes.

Limbic System

A complex system of nerves and networks in the brain, involving several areas near the edge of the cortex concerned with instinct and mood. It regulates basic emotions and drives.

Somatosensory Area

A region of the cerebral cortex involved in processing sensory information from the body, including touch, temperature, and pain.