The risk free rate is 1.75% and a portfolio has a sensitivity to the risk factors outlined in the table below.  Using the information provided, to 2 decimal places, answer the following questions.  (Note: numbers in red are negative)

 

Factor	Equity Risk Premium	SmB	HmL
Sensitivity		s = 0.34	h = 0.68
Risk premium	9.27%	1.84%	3.22%

Required

 

A portfolio delivered a return of 14.11%pa over a three year period.

 

An asset consultant uses the Capital Asset Pricing Model to assess manager performance, while the investment manager assesses its performance using the Fama-French model

 

1. According to the investment manager, how much Carhart alpha did the portfolio generate over the period?
2. If the asset consultant assessed that the investment manger generated 1.88%pa of Jensen's alpha over the period, what value of beta is the consultant using for the portfolio?
3. If, over the period, the market had a variance of 0.0377 whilst the portfolio had a variance of 0.0578, and using the consultant's value for beta, what must be the correlation of the portfolio with the market?
4. Consider two similar assets that are trading in the market.  Asset A has an expected return of 18.5%, whilst asset B has an expected return of 12.7%.
5. Explain which asset has the lower price and in terms of Modern Portfolio Theory explain why that is the case

 

1. In terms of value versus growth, which asset would be regarded as a value stock and which would be regarded as a growth stock?
2. "Risk and return are related" may be used as a summary of the "Portfolio Selection" paper by Harry Markowicz.  Explain (max 400 words)   
   • what "risk and return" means for investors,
   • if risk is predictable,
   • how risk is measured under Modern Portfolio Theory, and
   • if this measure encapsulates all risks.