a. Consider a portfolio, made up by selling short $10,000 of Contravent stocks and buying $10,000 of Sensor and $5000 of Cosmo. How sensitive will this portfolio be to each of the three factors? b. What is the expected return of your portfolio in (a) if the expected return on the S&P 500 index is 15%, the expected return on the SMB factor is 4%, the expected return on the HML factor is 2% and the risk free rate is 0.5% c. What is the systematic volatility (standard deviation of returns) of your portfolio in (a) given that the volatility of the S&P 500 index is 16%, the volatility of the SMB factor is 20% and the volatility of HML factor is 10%?
a. Consider a portfolio, made up by selling short $10,000 of Contravent stocks and buying $10,000 of Sensor and $5000 of Cosmo. How sensitive will this portfolio be to each of the three factors? b. What is the expected return of your portfolio in (a) if the expected return on the S&P 500 index is 15%, the expected return on the SMB factor is 4%, the expected return on the HML factor is 2% and the risk free rate is 0.5% c. What is the systematic volatility (standard deviation of returns) of your portfolio in (a) given that the volatility of the S&P 500 index is 16%, the volatility of the SMB factor is 20% and the volatility of HML factor is 10%?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 6
Consider a market in which the returns on common stocks are described by the Fama-French
Three Factor Model. The following table gives the factor sensitivities of Orange, Inc,
Fallmart, and Vesla| Inc. stocks to each of the three factors.
Security
BSp500
BSMB
Sensor, Inc.
1.5
-1.5
Contravent, Inc. 0.5
0.5
-0.5
Cosmo, Inc.
1.3
1.1
-0.8
a. Consider a portfolio, made up by selling short $10,000 of Contravent stocks and
buying $10,000 of Sensor and $5000 of Cosmo. How sensitive will this portfolio
be to each of the three factors?
b. What is the expected return of your portfolio in (a) if the expected return on the
S&P 500 index is 15%, the expected return on the SMB factor is 4%, the
expected return on the HML factor is 2% and the risk free rate is 0.5%
c. What is the systematic volatility (standard deviation of returns) of your portfolio
in (a) given that the volatility of the S&P 500 index is 16%, the volatility of the
SMB factor is 20% and the volatility of HML factor is 10%?
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