Lecture 5

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

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Unformatted text preview: Lecture 5 Value and Growth Stocks The Fama-French Model 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 . Let’s check if the CAPM holds for the value strategy. To do that, we estimate the following time-series regression: − = + − ¡ + , The null hypothesis is: 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 0.005 0.001 1.052 0.031 Test the null hypothesis of the CAPM: Conclusion from the hypothesis: Position of the value strategy relative to the security market line:...
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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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Lecture 5 - Lecture 5 Value and Growth Stocks The...

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