Tom Max, TMP 's quantitative analyst, has developed a portfolio construction model about which he is excited To create the model, Max made a list of the stocks currently in the S P 500 Stock Index and obtained annual operating cash flow, price, and total return data for each issue for the past five...

a The fundamental impact of the Fama and French research is to challenge the validity of the Capital Asset Pricing Model CAPM Specifically they found ...

Tom Max, TMP's quantitative analyst, has developed a portfolio construction model about which he is excited. To

Question:

Tom Max, TMP's quantitative analyst, has developed a construction model about which he is excited. To create the model, Max made a list of the currently in the S&P 500 Stock Index and obtained annual operating cash flow, price, and total return data for each issue for the past five years. As of each year-end, this universe was divided into five equal-weighted portfolios of 100 issues each, with selection based solely on the price/cash flow rankings of the individual Each portfolio's average annual return was then calculated.

During this five-year period, the linked returns from the portfolios with the lowest price/cash flow ratio generated an annualized total return of 19.0 percent, or 3.1 percentage points better than the 15.9 percent return on the S&P 500 Stock Index. Max also noted that the lowest price-cash-flow had a below-market beta of 0.91 over this same time span.

a. Briefly comment on Max's use of the beta measure as an indicator of risk in light of recent academic tests of its explanatory power with respect to stock returns.

b. You are familiar with the literature on market anomalies and inefficiencies. Against this background, discuss Max's use of a single-factor model (price-cash flow) in his research.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...