Fama-French questions

# Fama-French questions - French model Why do the two...

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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: Conclusion from the hypothesis:
Test the hypothesis that the average small stock does not differ from the average stock in terms of market risk: Test the hypothesis that the average small stock is not significantly exposed to distress risk:

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Why is the coefficient of the small stock portfolio positive? What is the expected risk premium of the small portfolio according to the CAPM?
What is the expected risk premium of the small portfolio according to the Fama-

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Unformatted text preview: French model? Why do the two estimates from above differ from each other? 2. For an equally weighted portfolio of firms in the pharmaceutical industry, the factor sensitivities with respect to the market, the size factor (SMB), and the book-to-market factor (HML) are 0.84, -0.35, and -0.63, respectively. a) Why are the factor sensitivities of this portfolio positive with respect to the market, negative with respect to SMB, and negative with respect to HML? b) Using average annual market risk premium of 5.2%, average annual SMB return of 3.2%, and average annual HML return of 5.4%, compute the annual expected risk premium for the portfolio consisting of these firms under the Fama-French model. c) The annual risk-free rate is 2%. Compute the annual expected return for the portfolio consisting of these firms under the Fama-French model. d) Explain in detail how the HML factor is constructed....
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## This note was uploaded on 02/06/2012 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue.

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Fama-French questions - French model Why do the two...

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