Consider an investor who is looking into the performance of a particular portfolio. She found that the historical estimates of the mean and variance of the portfolio's monthly return are 0.95% and 1.4%, respectively. She also estimated the mean and variance of the market portfolio's monthly return to be 1.0% and 1.6%, respectively, and the correlation between the return rates of the portfolio and the market is 0.85. The monthly risk-free return rate is flat at 0.15% in the past. (a) According to CAPM, is the strategy of this portfolio a good one? Why? (b) After learning the Fama-French three-factor model, the investor believes the Fama-French three-factor model instead of CAPM should be used to assess the performance of the portfolio's strategy. To this end, the investor estimated the loadings of the portfolio for SMB and HML, which turn out to be -0.23 and 0.52, respectively. She also estimated the expected payoffs for the zero-cost strategies associated with SMB and HML to be 0.44% and 0.54%, respectively. Is this portfolio's strategy a good one under the Fama-French three-factor model? Why? Consider an investor who is looking into the performance of a particular portfolio. She found that the historical estimates of the mean and variance of the portfolio's monthly return are 0.95% and 1.4%, respectively. She also estimated the mean and variance of the market portfolio's monthly return to be 1.0% and 1.6%, respectively, and the correlation between the return rates of the portfolio and the market is 0.85. The monthly risk-free return rate is flat at 0.15% in the past. (a) According to CAPM, is the strategy of this portfolio a good one? Why? (b) After learning the Fama-French three-factor model, the investor believes the Fama-French three-factor model instead of CAPM should be used to assess the performance of the portfolio's strategy. To this end, the investor estimated the loadings of the portfolio for SMB and HML, which turn out to be -0.23 and 0.52, respectively. She also estimated the expected payoffs for the zero-cost strategies associated with SMB and HML to be 0.44% and 0.54%, respectively. Is this portfolio's strategy a good one under the Fama-French three-factor model? Why
