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Question 61

1. Which of the following is correct?

   1. Suppose risk-based explanation are responsible for the size and value effects. The risk that explains these effects are the CAPM beta. That is, small firms have a beta that is higher enough to justify their higher returns than large firms.

   2. Suppose risk-based explanation are responsible for the size and value effects. The risk that explains these effects are firm specific risks rather than systematic risks. For example, only one individual small or value firm may have a huge default risk.

   3. Suppose risk-based explanation are responsible for the size and value effects. The risk that explains these effects are systematic risks. More specifically, it is related to the betas with respect to the SMB and HML risk factors. For example, small firms have high beta with respect to SMB, meaning higher SMB related risk.

   4. Suppose risk-based explanation are responsible for the size and value effects. The risk that explains these effects are systematic risks. These sysmatic risks are particularly related to recessions. For example, small and value firms are much more likely to go bankrupt in recessions than other firms.

   		1 ONLY
   		2 ONLY
   		3 and 4 ONLY
   		1 and 3 ONLY

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