Question: Question 2 The chart below shows average returns and betas with respect to US value weighted market portfolios for 10 portfolios of US stocks formed

Question 2 The chart below shows average returns and betas with

Question 2 The chart below shows average returns and betas with respect to US value weighted market portfolios for 10 portfolios of US stocks formed annually on sorted values of book- to-market equity (B/M) ratio. Average Annualized Monthly Return versus Beta for Value Weight Portfolios Formed on B/M, 19632003 17- 110 (highest B/M) 16- 15 19 14- 16 Average annualized monthly return (%) 13- 12-1 Average returns predicted by the CAPM 11- 10- 11 (lowest B/M) 9 0.7 0.8 0.9 1.1 1.2 Beta Carefully explain the implications, on the CAPM, of the findings depicted in the chart above. What do previous findings on empirical tests of the CAPM reveal? (7 marks)

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