Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Concept explainers

Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for …
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Given the monthly returns below, calculate the Fama French 3-factor (FF3) alpha and betas of strategy X. Then use those estimates to calculate the expected FF3 monthly return assuming that the expected return of each of the factors is equal to their historical mean return. Also assume that the performance of strategy X relative to the FF3 factors in the future will be the same as in the past, which is to say, it will generate the same alpha and betas. 1% 20% 12% 2% 21% -7% 5% -2% 9% 10% 19% 19% -6% 12% -6% 0% 20% 11% Strategy X Monthly excess return MKTRF 3% 4% -6% 1% 3% -4% 0% 12% 15% 17% 2% 10% 12% 15% -4% -7% 1% -5% 6% 11% -1% -7% 12% -2% -2% -6% 16% 14% 13% -5% 19% 20% 12% -6% 6% -4% SMB HML -9% 14% -6% 8% 6% 16% -2% 6% 17% -6% -8% -7% 16% 12% -7% -9% 18% 11%
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Transcribed Image Text:Given the monthly returns below, calculate the Fama French 3-factor (FF3) alpha and betas of strategy X. Then use those estimates to calculate the expected FF3 monthly return assuming that the expected return of each of the factors is equal to their historical mean return. Also assume that the performance of strategy X relative to the FF3 factors in the future will be the same as in the past, which is to say, it will generate the same alpha and betas. 1% 20% 12% 2% 21% -7% 5% -2% 9% 10% 19% 19% -6% 12% -6% 0% 20% 11% Strategy X Monthly excess return MKTRF 3% 4% -6% 1% 3% -4% 0% 12% 15% 17% 2% 10% 12% 15% -4% -7% 1% -5% 6% 11% -1% -7% 12% -2% -2% -6% 16% 14% 13% -5% 19% 20% 12% -6% 6% -4% SMB HML -9% 14% -6% 8% 6% 16% -2% 6% 17% -6% -8% -7% 16% 12% -7% -9% 18% 11%
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