The diagram below shows the Cochrane (2001) empirical test of the CAPM using size- sorted portfolios....

 

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The diagram below shows the Cochrane (2001) empirical test of the CAPM using size- sorted portfolios. Hp - Tf Hm - rf BIG SMALL SML Вм Вр a) According to the diagram, what is the empirical relation between firm beta and firm size i.e. market capitalization? b) From the diagram, how would you describe the ability of the Security Market Line (SML) to explain risk and return for the ten size-sorted portfolios? c) With reference to the CAPM, elaborate on the following statement: "Since small stocks are riskier than big stocks, it is not surprising that they should also provide higher average excess return". The diagram below shows the Cochrane (2001) empirical test of the CAPM using size- sorted portfolios. Hp - Tf Hm - rf BIG SMALL SML Вм Вр a) According to the diagram, what is the empirical relation between firm beta and firm size i.e. market capitalization? b) From the diagram, how would you describe the ability of the Security Market Line (SML) to explain risk and return for the ten size-sorted portfolios? c) With reference to the CAPM, elaborate on the following statement: "Since small stocks are riskier than big stocks, it is not surprising that they should also provide higher average excess return".

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a According to the diagram there is a positive relatio... View the full answer