Eugene Fama and Kenneth French (among others) have shown the following five factors are associated with higher future share returns:

1. Market factor: High beta firms earn higher returns

2. Value factor: firms with high book-to-market ratio firms earn higher returns

3. Size factor: small (i.e., firms with low market capitalisation) firms earn higher returns

4. Profitability factor: More profitable firms (i.e., firms with high gross margin to total assets) are expected to earn higher returns

5. Investment factor: Firms that invest conservatively (smaller increase in total assets) earn higher returns.

Answer the following questions:

Q2(Profitability factor): If a firm has a characteristic that is, for whatever reason, unattractive to investors would you expect it to have a lower price or a higher price, other things being equal? Would you expect it to have lower future return or a higher future return, other things being equal? Do you think most investors would find high profitability to be attractive or unattractive?

Q2(Investment factor): If a firm invests in capital to expand its business is that a good sign or a a bad sign for future profits?

Q3: A fund manager points to her investment record for the past ten years and claims that she is very good at her work because she has earned 10% every year. What method or approach would you use to assess the validity the fund managers claim that she is very good?