Question
a. What are the risk factors incorporated in the Fama and French three factor models? How are they measured? b. Why do we not subtract
a. What are the risk factors incorporated in the Fama and French three factor models? How are they measured? b. Why do we not subtract the risk-free rate from SMB or HML? Why do we subtract the riskfree rate from Rm ? c. Cahart (1997) incorporated a forth factor so called momentum into the Fama-French model. Define momentum and describe how it is measured. d. Recently, Fama and French (2015) introduce the five-factor model. What is the difference in the way the SMB and HML factors are measured in the three-factor model and the five-factor model? e. Suppose I sort stocks into portfolios by their betas to detect any new return pattern and document the results in the below table. Is there any evidence suggesting a new anomaly (i.e. return pattern not explained by existing asset pricing models) with respect to the CAPM? Beta 0.84 0.89 0.93 0.98 1.04 1.09 1.12 1.19 Returns 0.45 0.62 0.8 0.99 1.16 1.45 1.48 1.72
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