Medium Answer Questions (
12. Explain Roll’s Critique [from Roll (1977)]. Then answer, if we run OLS regressions of stock returns on the market portfolio, but find no significant alpha, does this mean that theCAPM is valid? Does alpha significantly different from zero always mean inefficiency?
Long Answer Questions (Answer 2 of 3) (25 points each)
If you do all 3, the lowest scoring 2 will count toward your exam grade.
Instructions PLEASE READ:
Long answer questions are broken up into several parts. I did this to make grading 80 examseasier, more consistent and more fair.
Please label your answers with the question numberand letter
(e.g. ‘12b’) carefully which question and which question part you are answering.
Please keep answers to each part separate
, if not you might receive a lower grade, becauseI will not be looking for the answer to part ‘b’ in part ‘a’.13a) When we say, “Factor X is priced.” What does that mean? What does it mean to say afactor is priced? (5 points)13b) Suppose you find evidence that a proposed factor is highly correlated with the timeseries of stock returns. Is this evidence that the factor is priced? (5 points)13c) Describe
empirical tests to demonstrate whether or not a factor is priced. “indetail” means that you should describe each step of the test (for example, Step 1: Get returnsfor all stocks, Step 2: estimate ____, etc.). (10 points)13d) For each step in 13c, please explain the economic or statistical motivation for each step.For example, if you say the first step is to get returns for all stocks, the economic motivationmight be because you expect a factor to be able to price all assets in an economy. Stocks areone class of assets in the economy, and the returns are easy to get. (5 points)