FRM Part II · FRM Exam Part II · Factors
Which empirical finding is most commonly cited as a challenge to the CAPM's prediction that beta alone explains cross-sectional expected returns?
The low-beta anomaly is the common challenge: low-beta stocks have earned more than the CAPM predicts, meaning the empirical security market line is flatter than theory implies, so beta alone does not explain expected returns.
- AStocks with low market beta have historically earned returns higher than the CAPM predictsCorrect
- BInvestors hold the market portfolio in equilibrium
- CBeta is always equal to one for diversified portfolios
- DThe risk-free rate is constant over time
Explanation
The low-risk anomaly shows the security market line is flatter than predicted: low-beta assets show positive alpha and high-beta assets negative alpha. The other options are CAPM assumptions or incorrect statements, not empirical challenges.
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