Factor models and market efficiency

Factor models and market efficiency

1. 1. Which patterns in stock returns are NOT explained by CAPM but ARE captured by factor models?

   Small-cap stocks outperform large-cap on a risk-adjusted basisValue stocks outperform growth stocks at similar betaPast 3-12 month winners continue outperformingTreasury bills earn the risk-free rate

2. 2. The Fama-French three-factor model adds which two factors to CAPM?

   SMB (Small Minus Big) and HML (High Minus Low book-to-market)Momentum and QualityInflation and GDP growthDividend yield and earnings surprise

3. 3. Which form of the Efficient Markets Hypothesis is most clearly violated empirically?

   Weak form (prices reflect past prices)Semi-strong form (prices reflect public information)Strong form (prices reflect all information, including insider info)All three forms are confirmed

4. 4. Most active mutual fund managers underperform passive index funds after fees. What does this support?

   Markets are inefficient and managers are incompetentSemi-strong EMH: even with skill, the cost of trying to beat the market typically exceeds the alpha generatedStrong-form EMHThat hedge funds are better than mutual funds