Q1-5. An investor estimated factor loadings of his/her well-diversified stock portfolio using FamaFrench 3 multifactor model assuming that APT holds:

Alpha -0.000032

Mkt-Rf 1.108

SMB -0.1280

HML-0.0038

Which of the following interpretations are CORRECT?

I. Given the negative factor loadings, the three factor model does not seem to work.

II. Given that the alpha is close to zero, it is likely that there are omitted factors not captured by this three factor model.

III. Given the negative loadings on SMB and HML, this portfolio is more likely to have higher returns when the market suffers from size or book-to-market related negative systematic shock.

IV. Given the negative loadings on SMB and HML, this portfolio should have been composed of firms with large size and high book-to-market ratio.

A. I only

B. III only

C. I and III only

D. III and IV only

E. I, III and IV only