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CFA Level 1 Exam

3959 Questions

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Question No. 1

To test whether small-cap stocks perform worse than large stocks under the Fama-French three-factor model, you set up the following hypothesis:

Ho: Expected excess returns of small stocks = 0
H1: Expected excess returns of small stocks < 0
The excess returns are returns adjusted for risk using the Fama-French three-factor model. In this setup,
which of the following is/are true?
I. You must employ a right-tailed test.
II. The rejection region for the z-statistic on the excess return extends from negative infinity to the critical value
associated with the significance level.
III. It is harder to reject the null than in the case where the alternative is specified as H1: Excess returns are
non-zero.
Choose the correct option from the given list.
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