1. Summarize Fama and Frenchs findings from theirfive-factor model. Compare this new model with the older CAPM and the Fama-French three-factor models.

2. What are smart beta ETFs? Are they active or passive? How big is the market for smart beta products? What is the business case for offering a multifactor ETF?

3. Explain the basic smart beta portfolio construction methodology. How is it different from the traditional market capitalization weighing? What is meant by the top-down approach versus the bottom-up approach in the construction of multifactor indexes?

4. Use the data in Exhibit 1 (see supplementary Excel file):

a. Calculate the annualized average returns from the 6 factor groups of quintile portfolios.

b. Create bar charts similar to the ones given in the case file (Figures 1-6).

c. Do the same patterns presented in the case filestill hold for the 2005-2014 period? Be as specific as possible (do not answer just yes or no).

5. Use data in Exhibit 2 (see supplementary Excel file):

a. Create an equal-weighted portfolio of the four individual factor portfolios (size, value, quality, momentum). Calculate the annualized average returns, standard deviations, and the Sharpe ratios for the single factor portfolios, the equal-weighted combination you created, the MSCI Multifactor index, and the MSCI USA index. Take the average risk-free rate as 1.41% (annualized) over this time period.

b. Calculate the total cumulative returns (growth of $1) for the same portfolios as above between 2005 and 2014.

c. Based on these statistics which portfolio has performed the best? Which single factor portfolios have beaten the market (if any)? Is it better to divide up your money across the four single factor portfolios, or invest in onemultifactor portfolio?

6. Make a recommendation to BlackRock on whether to launch a new multifactor ETF or not. Imagine yourself as the independent consultant and write accordingly. Support your case with the insights you have gained throughout theempirical analysis.

7. BlackRock actually launched its multifactor ETF in April of 2015. Go to Yahoo Finance and download the monthly prices for this fund since inception (Name: iShares MSCI USA Multifactor ETF, Ticker: LRGF), along with their S&P 500 index fund (Name: iShares Core S&P 500 ETF, Ticker: IVV). Calculate the annualized average monthly returns and the compound annual growth rate for both funds. Was the multifactor fund able to beat the S&P 500 out-of-sample?