Question 6

The risk-free interest rate is 4% and the expected return on the market portfolio is 10%. Scott, a portfolio manager, runs a portfolio that has a beta of 2/3 and an average annual return of 9% per year.

Based on the CAPM the abnormal return (i.e. ) of Scotts portfolio is 1%

Following 6

Assume the return on the size factor is 3.5% and the return on the B/M factor is 5%. Scotts portfolio has a market beta of 2/3, a _SMB of 0.9, and a _HML of -0.5. The average annual return on his portfolio is 9%.

Based on the FF3 factor model, what is the abnormal return (i.e. ) of Scotts portfolio?

***Show me the step by step calculations of how you found the abnormal return.