Question

Which of the following outcome(s) are most likely to be inconsistent with the efficient market hypothesis in a Fama-French three-factor world?

a. Higher market beta stocks have higher returns.

b. All stocks have the same return on average.

c. Even though DFA recently offered small and value portfolios, which focus on earning the high returns in small and value stocks, investors do not feel such stock portfolios offer more attractive investment opportunities in terms of risk-return tradeoff than other stock portfolios.

d. Small and value stocks on average have higher returns than large and growth stocks, respectively.

Answer 1

Option B. All stocks have the same return on average

Fama-French three-factor Model is an extension of the CAPM model where CAPM model uses only one variable i.e., Beta but Fams-French Model uses three variables size risk, value risk and Beta where it tries to prove small cap stocks can outperform market. Thus the statement saying all stocks have same return on average is wrong.