Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A simple approach for forecasting expected returns is to start with a set of core assets, such as the five factors proposed in the Harvard
A simple approach for forecasting expected returns is to start with a set of core assets, such as the five factors proposed in the Harvard University study. Next, we would like to derive the expected value of assets possessing multiple risks. The related beta coefficients based on a regularized regression are shown below for 10 asset categories. For example, we can see that the expected return of hedge funds (absolute return) =.2.09+.2.06=3%. A. Suppose the investor is concerned about long-term future inflation increases. Which asset categories would be the most sensitive to inflation? B. Recently, U.S. treasury securities have been severely hit by increasing interest rates - with sharp losses. What is the impact of this increase in interest rates on future returns of S\&P 500 (equity if we adhere to the factor approach? C. The momentum factor suggests that securities that have underperformed will continue to do so over a short-term horizon. Is this assumption consistent with the future return estimates by the regression below, say for fixed-income assets given the large drop in U.S. Treasury securities in 2022? What might explain any differences? Exhibit The Five Factor Harvard University Endowment Study with Derived Expected Values A simple approach for forecasting expected returns is to start with a set of core assets, such as the five factors proposed in the Harvard University study. Next, we would like to derive the expected value of assets possessing multiple risks. The related beta coefficients based on a regularized regression are shown below for 10 asset categories. For example, we can see that the expected return of hedge funds (absolute return) =.2.09+.2.06=3%. A. Suppose the investor is concerned about long-term future inflation increases. Which asset categories would be the most sensitive to inflation? B. Recently, U.S. treasury securities have been severely hit by increasing interest rates - with sharp losses. What is the impact of this increase in interest rates on future returns of S\&P 500 (equity if we adhere to the factor approach? C. The momentum factor suggests that securities that have underperformed will continue to do so over a short-term horizon. Is this assumption consistent with the future return estimates by the regression below, say for fixed-income assets given the large drop in U.S. Treasury securities in 2022? What might explain any differences? Exhibit The Five Factor Harvard University Endowment Study with Derived Expected Values
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started