Fama-French questions_sol

# Fama-French questions_sol - Fama-French Model Sample...

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Fama-French Model Sample Questions 1. Let denote the realized return on a value-weighted portfolio of small stocks. Let’s check if the Fama-French model holds for the small portfolio. To do that, we estimate the following time-series regression using monthly data: . The null hypothesis is: The output from estimating the Fama-French regression for the small strategy is:

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Regression Statistics R Square 0.92 Standard Error 0.02 Observations 564 Coefficients Standard Error -0.0006 0.0008 0.9031 0.0184 0.2449 0.0277 1.2310 0.0255 Test the null hypothesis of the Fama-French model: t-stat = (-0.0006-0)/0.0008 = -0.75 Conclusion from the hypothesis:
Since the t-stat is less than 2 in absolute value, the null hypothesis cannot be rejected. This implies that the Fama-French model holds for the small portfolio. Test the hypothesis that the average small stock does not differ from the average stock in terms of market risk: t-stat = (0.9031-1)/0.0184 = -5.27 Since the t-stat is more than 2 in absolute value, the null hypothesis is rejected. This implies that the average small stock does not have the same market risk as the average stock.

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