Reference no: EM132978905
Consider the Fama-French + Momentum asset pricing model, where in addition to the Fama-French three factors, a fourth factor for momentum is also included. Specifically, the momentum factor is the return on a portfolio of Winner stocks minus the return of a portfolio of Loser stocks, where Winner refers to top tercile best performing stocks over the past year and Loser refers to worst performing tercile of stocks over the past year. You may assume that the factor risk premiums are all positive in this model.
Stock X: small cap, high book-to-market, has performed very well over the past year; negative factor loadings on each of the 4 factors.
Stock Y: large cap, low book-to-market, has performed very poorly over the past year; positive factor loadings on each of the 4 factors.
Which of the following would support the validity of the 4-factor model?
Stock X has a positive 4-factor alpha
Stock Y has a positive 4-factor alpha
Stock X has a higher expected return than Stock Y
Stock Y has a higher expected return than stock X
More than one of the above
None of the above
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