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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 booktomarket 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 FamaFrench model. c) The annual riskfree rate is 2%. Compute the annual expected return for the portfolio consisting of these firms under the FamaFrench model. d) Explain in detail how the HML factor is constructed....
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 Spring '09
 Clarke

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