7/7 stocks and vice versa for growth stocks. This factor is included because of the historical tendency for value stocks to earn a higher return. In models such as the one Dawn is considering, the alpha ( α ) term is of particular interest. It is the regression intercept, but, more important, it is also the excess return the asset earned. In other words, if the alpha is positive, the asset earned a return greater than it should have given its level of risk; if the alpha is negative, the asset earned a return lower than it should have given its level of risk. This measure is called Jensen ’ salpha, and it is a very widely used tool for mutual fund evaluation. 1. For a large-company stock mutual fund, would you expect the betas to be positive or negative for each of the factors in a Fama – French multifactor model? 2. The Fama – French factors and risk-free rates are available at Kenneth French ’ s website: . Download the monthly factors and save the most recent 60 months for each factor. The historical prices for each of the mutual funds can be found on various websites, including http:// fi nance.yahoo.com . Find the price of each mutual fund for the same time as the Fama – French factors and calculate the returns for each month. Be sure to include dividends. For each mutual fund, estimate the multifactor regression equation using the Fama – French factors. How well do the regression estimates explain the variation in the return of each mutual fund? 3. What do you observe about the beta coe ﬃ cients for the di ff erent mutual funds? Comment on any similarities or di ff erences. 4. If the market is e ﬃ cient, what value would you expect for alpha? Do your estimates support market e ﬃ ciency? 5. Which fund has performed best considering its risk? Why? For more information on the resources available from McGraw-Hill Ryerson, go to .
- Fall '13
- Capital Asset Pricing Model