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Lecture 5 - Lecture 5 Value and Growth Stocks The...

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Lecture 5 Value and Growth Stocks The Fama-French Model
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At the beginning of each year, sort all stocks in the investment universe based on their most recent Book/Market ratios. Pick the top 10% of stocks in terms of B/M ratios and form a value-weighted portfolio of those. Hold the portfolio for one year. After one year, repeat this strategy. Record the monthly returns of the strategy. This is called a value strategy. Denote its returns over time as 𝑅 𝑉𝑡 . Let’s check if the CAPM holds for the value strategy. To do that, we estimate the following time-series regression: 𝑅 𝑉𝑡 − 𝑅 𝑓𝑡 = 𝛼 𝑉 + 𝛽 𝑉 �𝑅 𝑀𝑡 − 𝑅 𝑓𝑡 + 𝜀 𝑉𝑡 , The null hypothesis is:
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The output from estimating the CAPM regression for the value strategy is: Regression Statistics R Square 0.67 Standard Error 0.03 Observations 564 Coefficients Standard Error 𝛼 𝑉 0.005 0.001 𝛽 𝑉 1.052 0.031 Test the null hypothesis of the CAPM: Conclusion from the hypothesis:
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  • Spring '09
  • Clarke
  • Statistics, Null hypothesis, 10%, one year, Consumer Cyclicals Consumer Services Industrials Utilities Transportation Health Care Technology Telecommunications Commercial Services Financial Services

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