Finding imply about the returns of your strategy

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Reference no: EM133655473

Questions

1. Why is price impact a measure of the illiquidity of a stock? How can we measure it?

2. What is the Pastor-Stambaugh liquidity factor? How can a portfolio manager use it to measure the liquidity risk of a stock?

3. You construct along-short investment strategy that earns a positive and significant alpha with respect to a 4-factor model that includes the market risk premium, SMB, HML, and the momentum factor. When you add the Pastor-Stambaugh liquidity factor, the alpha of your strategy decreases and becomes insignificant. What does this finding imply about the returns of your strategy? Explain.

Reference no: EM133655473

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