The estiamted factor sensitivities of ABC to Fama French factors and the risk premia associated with those factors are given below; Factor Sensitivity Risk Premium(%) Market factor 1.2 4.5 Size factor -0.50 2.7 Value factor -0.15 4.3 Question: Describe the expected style characteristics of ABC based on its factor sensitives; Market Cap Growth Orientated Market risk A Large Yes High B Small No High C Large Yes Low
Answer: A… ABC appears to be a large cap, growth orientated , high market risk stock as indicated by its negative size beta, negative value beta and market beta above 1
A Fama French measures sensitivity to small cap ans value factors.
so negative size beta and negative value beta means its large cap and growth oriented? :S i dont remember reading this.
A? I don’t know if this is the right way to think about the problem but here goes: off the top of my head cuz i don’t have the books with me, i know the size factor measures (SMALL CAP - LARGE CAP). Since the “size factor” sensitivity is negative, you know that (SMALL - LARGE) is negative, hence LARGE dominates and you know it’s a large cap. That eliminates ‘B’. The others do the same thing but I forget how the order goes. Is value factor (Value - Growth)? The value factor is negative so it could be that way… correct me if i’m wrong guys. if i’m wrong, i’ll delete the post so as to not to confuse everyone
Size Factor Risk Premium = (BIG-SMALL) returns; Value Factor Risk Premium = (High B/M - Low B/M) The big firms’ returns are lower, I think. So ABC’s size factor sensitivity < 0 => it’s a large firm.
size = smb small minus big value=hml = high pb minus low pb (pb=price to book) market = rm-rf
Thanks. I was wrong, it shall be: Size Factor Risk Premium = (SMALL-BIG) . It seems that Schweser online course’s slide got a typo there.
CP, You inverted the value factor. Should be low pb - high pb, or conversely, high book to market - low book to market. cpk123 Wrote: ------------------------------------------------------- > size = smb small minus big > value=hml = high pb minus low pb (pb=price to > book) > market = rm-rf