Answered step by step
Verified Expert Solution
Question
1 Approved Answer
SECTION A Question 1. [10 points] Consider the following two excess returns from a factor model with three factors for Stock A and Stock B.
SECTION A Question 1. [10 points] Consider the following two excess returns from a factor model with three factors for Stock A and Stock B. The factors are (i) Momentum (denoted below as F1), (ii) Size (denoted below as F2), and (iii) Value (denoted below as F3). The risk free rate over this period was 1% and the market's average return was 11%. Factor model regression estimates Stock A -0.5% + 1.2(F1) + 0.7(F2) + 1.1(F3) -1.82 2.49 Stock B 0.5% + 0.9(F1) + 1.8(F2) + 0.5(F3) 2.11 2.01 1.56 2.80 t-stat of the intercept from the market model t-stat of the coefficient estimate for the exposure to F1 t-stat of the coefficient estimate for the exposure to F2 t-stat of the coefficient estimate for the exposure to F3 Rsquared 2.32 1.77 0.58 0.44 i. Calculate the alpha for each stock ii. From the stocks' exposures to the three factors shown above, what can you say about the firm characteristics (firm type, such as size etc.) you presume/think Stock A and Stock B have? SECTION A Question 1. [10 points] Consider the following two excess returns from a factor model with three factors for Stock A and Stock B. The factors are (i) Momentum (denoted below as F1), (ii) Size (denoted below as F2), and (iii) Value (denoted below as F3). The risk free rate over this period was 1% and the market's average return was 11%. Factor model regression estimates Stock A -0.5% + 1.2(F1) + 0.7(F2) + 1.1(F3) -1.82 2.49 Stock B 0.5% + 0.9(F1) + 1.8(F2) + 0.5(F3) 2.11 2.01 1.56 2.80 t-stat of the intercept from the market model t-stat of the coefficient estimate for the exposure to F1 t-stat of the coefficient estimate for the exposure to F2 t-stat of the coefficient estimate for the exposure to F3 Rsquared 2.32 1.77 0.58 0.44 i. Calculate the alpha for each stock ii. From the stocks' exposures to the three factors shown above, what can you say about the firm characteristics (firm type, such as size etc.) you presume/think Stock A and Stock B have
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started