Assuming that both the three-factor model (TFM) and the Carhart four-factor model (FFM) are used to estimate
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Question:
Assuming that both the three-factor model (TFM) and the Carhart four-factor model (FFM) are used to estimate the alpha of an active portfolio. Explain which model is likely to result in alpha of higher magnitude. Also explain why might one model be preferred to another in adjusting for the risk of an active portfolio.
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