True, False or Uncertain, and explain why. 1. Differences in expected returns on

Question

True, False or Uncertain, and explain why.

1. Differences in expected returns on stocks across firms are entirely due to differences in the expected return for the market minus the riskfree rate.

2. Stock returns typically have distributions that look like normal distributions with no skewness and the same kurtosis (fatness of tails) as the normal distribution.

3. The average excess real return on stocks over the last ten years is the best guide to the future excess real return on stocks.

4. The Sharpe ratios for individual stocks are the best guides to choose the fraction of a portfolio held in individual stocks in a portfolio.

5. If more than one factor affects stock returns, then the Arbitrage Pricing Theory (APT) is a more useful way of thinking about stock returns than the CapitalAsset Pricing Model (CAPM)

Explanation / Answer

1. False: It is because of beta which is measure of risk, as per CAPM required return: Rf +b(Rm-Rf)

2. True: Stock return typically have distributions that look nirmal distribution with no skewness and the same kurtosis(fatness of tails) as the normal distribution.

3. False: Future return are not only based on past performance but also on future government policies changing customer preference etc.

4. True: The Sharpe ratio is Risk adjusted measures of return thatis often used to evaluate the performance of a portfolio.

5. True: CAPM method has a downfall that it only consider one factor to over come this downfall APT method was discovered.

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