Using historical risk premiums from Table 5.4 over the 1926-2016 period as your guide, what would be your estimate of the expected annual HPR on the BigNalue portfolio if the current risk-free interest rate is 3%?

Transcribed Image Text:

A. 1926-June 2016 Mean excess return (annualized) Standard deviation (annualized) Sharpe ratio Lower partial SD (annualized) Skew Kurtosis VaR (1%) actual (monthly) returns. VaR (1%) normal distribution % of monthly returns more than 3 SD below mean Expected shortfall (monthly) B. 1952-June 2016 Mean excess return (annualized) Standard deviation (annualized) Sharpe ratio Lower partial SD (annualized) Skew Kurtosis VaR (1%) actual (monthly) returns VaR (1%) normal distribution % of monthly returns more than 3 SD below mean Expected shortfall (monthly) Market Index 08.30 18.64 0.45 19.49 0.20 7.77 -13.95 -11.87 0.94% -20.14 7.52 14.89 0.50 16.51 -0.52 1.90 -10,80 -9.37 0.66% -18.85 Big/Growth 7.98 18.50 C.43 18.57 -0.10 5.55 - 14.68 -11.80 0.75% -20.33 7.18 15.54 C.46 15.67 -0.36 1.81 -10.90 -9.84 C.66% -17.99 Big/Value 11.67 24.62 0.47 22.78 1.70 19.05 -19.53 -15.63 0.94% -24.30 9.92 15.95 0.62 16.01 -0.29 2.26 -11.94 -9.89 0.80% -21.30 Small/Growth Small/Value 8.79 26.21 0.34 25.92 0.70 7.83 -20.59 - 16.92 0.75% -25.02 7.05 22.33 0.32 23.79 -0.36 2.17 -16.93 -14.41 0.93% -24.66 15.56 28.36 0.55 25.98 2.19 22.21 -20.47 -17.87 0.57% -25.76 Table 5.4 Statistics for monthly excess returns on the market index and four style portfolios Sources: Author's calculations using data from Prof. Kenneth French's website: http://mba.tuck.dartmouth.edu/pages/faculty/