Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(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

(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, if any, did Hiccup's portfolio generate after applying these betas in a four-factor (including the market) Fama-French model?

(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's ETF, the broad market portfolio, and Treasury bills [Note: you can ignore the Fama-French betas in this instance].

(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.

image text in transcribed
C. You wish to analyze the performance of Hiccup Strategies, an investment manager that claims its equity portfolio added alpha over the past year. You collect the following data: Risk Factor Factor's Spread Hiccup's Factor Beta Market Not Applicable 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]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Survey Of Economics, Principles, Applications, And Tools

Authors: Arthur O'Sullivan, Steven M. Sheffrin, Stephen J. Perez

5th Edition

0132556073, 978-0132556071

More Books

Students also viewed these Finance questions

Question

5. Give some examples of hidden knowledge.

Answered: 1 week ago