1) Short questions 1. Discuss how profitability and carnings growth affect market value and expected returns a s swim, the Ca. Maulis D. forms with higher , Leftabey ance higher ex, at=d returns. Provide an audition for your ans er 2. Discuss the evidence .n the effect of quality on the market- to book ratio as well as expected returns 3. Dis uss the man catures , the Buffet-style portfolio discussed in . lass. Explain how can we use multi ticto. models to const. uct such portfolio and which factors ware weed in the Sufi- tye portiondo. 4. Explain the theory of pocaative bubbles discussed in cla . what are the two main ingredients of this theor_ ? 5. Describe the behavior of hedge funds dering the Jot-Com Bubble Did they attempt to ride or attack the bubbie? 2) Be ting against beta !: Theo y Consider an economy where the security market line the relationship between expected returns and market beta, is too flat compared to the prediction by the CAPM. This implies that low-beta companies have positive apia, whil . high beta compames have n got-ve aipha. In particular .. assume that company as aug .CE: by the formula G= =0.01(1 - Be). Cuppose the m riet beta of company . .$ 8. =0.5, the ma.ket beta of company z ic 8. = 1.5, the market return is Ermi = 5% and the risk-free rate is ry = 0.6. 1. Com, ute r and the expected return of companies 1 and 2. 2. Consider the belling-against-b da (BAD) strateg, ..I c the wives.or's portfolio weights are i . raul related to ueta. Under this strategy, the portfolio weights are given by ..BAR = , a AB = 7 , and 1-18-13 - mgAB in the risk-free asset. Compute the return of the RAB strategy. 3. Compute the beta of the JAB portfolio. Hint: the beta of any portfolio is given by average of the betas of the individual companies, that is, Bp - - wif + w2p2. 4. What is the alpha of the BAB portf io? Show that, even though BAB is a zero-beta portfolio, the return on the portfolio exceeds the risk-free rate. 5. Colve for the portfolio that gives ze o weight to asset 2 and that achieves beta of : Show that this portfolio has positive o. Therefore, it the CAPM fails, it is possible to find a strategy that systematically beats the market despite having the same beta of the market portfolio. 3) Betting against beta II: Practice In this question, you will look at the performance of the Betting Against Beta (BAB) factor relative to other well-known factors. . ou will need to download the spreadsheet with the data from the website of the investment company AQR (google "betting against beta aqr data" or check this link). You can find on IT- avoid confisi . with the CAPM's alpha, I am den tin,, the , urefo.i feight by w in subs mestir. M reo.er, nuts that thi" "the,} is n thece sari., th: res.x of a meal. variance analysis "riva , 0..- us. al rermila
