Question
A. Youwish to analyze the performance of Hiccup Strategies, an investment manager that claims its equity portfolio added alpha over the pastyear.Youcollect the followingdata: Risk
A.Youwish to analyze the performance of Hiccup Strategies, an investment manager that claims its equity portfolio added alpha over the pastyear.Youcollect the followingdata:
Risk Factor
Market
Factor's Spread
Not Applicable
Hiccup's Factor Beta
1.20
SMB
1.50%
1.35
HML
2.10%
-0.80
Liquidity
2.75%
0.60
[Note: factor spreads are quoted as per annum percentage returns.]
(i)Hiccup's equity portfolio advanced by 12% last year after fees. If the broad equity market returned 8.2% and Treasury Bills earned 1.2% over that same period, what amount of alpha, ifany,did Hiccup's portfolio generate after applying these betas in a four-factor (including the market) Fama-French model? (10points)
(ii)Assume Hiccup Strategies offers this equity strategy in an ETF format, which means it can be shorted. Further assume you can borrow as well as invest at the risk free rate. Construct an arbitrage portfolio using Hiccup'sETF,the broad market portfolio, and Treasury bills [Note: you can ignore the Fama-French betas in this instance]. (10points)
(iii)Name two other commonly considered factors one might add to this four-factor calculation should you decide to attempt a more granular analysis of Hiccup's performance. (5points)
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