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In a landmark study, Fama and French (1992) show that the ratio of book equity to market equity (B/M ratio) has greater explanatory power for the cross section of stock returns than does the CAPM beta.
PART A
Briefly discuss the results from the study.
PART B
What is the relationship between book-to-market and average monthly returns?
PART C
What is the relationship between firm size (that is, market equity) and average monthly returns?
PART D
Which cell in a two-way sort of stocks on size and B/M ratio provides the highest average monthly return?
PART E
What type of problems might an investor expect to face in attempting to purchase stocks in the highest return cell?
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