CAS Exam 9 Spring 2014, Question 6
Study guide: Exam 9
Given the following information:
\beta_{Market} = 1.0\beta_{SMB} = 0.8\beta_{HML} = 1.1\alpha_{Stock\ A} = 2\%
| Portfolio characteristic | Expected Return |
|---|---|
| Small capitalization stocks | 9% |
| Medium capitalization stocks | 7% |
| Big capitalization stocks | 5% |
| High book-to-market ratio stocks | 7% |
| Medium book-to-market ratio stocks | 5% |
| Low book-to-market ratio stocks | 4% |
| Market | 6% |
- The risk-free rate is 1%.
- Assume no firm-specific influences.
Part a (0.5 points)
Briefly describe two market anomalies exhibited by the returns of the portfolios that seem to contradict the semi-strong form of the efficient market hypothesis.
Part b (1 point)
Calculate the expected return for Stock A using the Fama-French three-factor model.
Part c (0.5 points)
Describe the impact of liquidity on the Fama-French three-factor model.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution