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a. What are the risk factors incorporated in the Fama and French three factor models? How are they measured?
b. Why do we not subtract the risk-free rate from SMB or HML? Why do we subtract the riskfree rate from Rm ?
c. Cahart (1997) incorporated a forth factor so called “momentum” into the Fama-French model. Define “momentum” and describe how it is measured.
d. Recently, Fama and French (2015) introduce the five-factor model. What is the difference in the way the SMB and HML factors are measured in the three-factor model and the five-factor model?
e. Suppose I sort stocks into portfolios by their betas to detect any new return pattern and document the results in the below table. Is there any evidence suggesting a new ‘anomaly’ (i.e. return pattern not explained by existing asset pricing models) with respect to the CAPM?
Beta 0.84 0.89 0.93 0.98 1.04 1.09 1.12 1.19
Returns 0.45 0.62 0.8 0.99 1.16 1.45 1.48 1.72
Is there a relationship between the inflation rate and M3? What does the quantity theory of money discussed in Chapter 2 say the relationship should be?
At a discount rate of 10 percent, what is the present value of all three future benefits?
Avallone’s Pool Services Co. had sales of $2 million in March and $2.2 million in April. Expected sales for the next three months are $2.4 million, $2.5 million, and $2.7 million. Avallone’s has cash receipts from other sources of $100,000 per month...
A hostile takeover is the main method of transferring ownership interest in a corporation. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. A corporation is a legal entity th..
Studying historical stock price movements to identify mispriced stocks:
Explain your interpretation of the differences between informative and persuasive writing. Consider the following in your initial response:
A financial institution is planning to arrange a swap and requires a 50-basis-point spread. If the swap is to appear equally attractive to A and B, what rates of interest will A and B end up paying?
An annual coupon bond has a $1,000 face value coupon rate of 5%, will mature in 10 years, and currently sells for $810.34. What is the yield to maturity bond? What is the current yield of the bond? Why does the current yield differ from the yield to ..
Consider a three-year project with the following information: initial fixed asset investment = $870,000; straight-line depreciation to zero over the five-year life; zero salvage value; price = $34.05; variable costs = $22.55; fixed costs = $210,000; ..
A trader writes five naked put option contracts, with each contract being on 100 shares. The option price is $10, the time to maturity is six months, and the strike price is $64. What is the margin requirement if the stock price is $58? How would the..
Thirsty Cactus Corp. just paid a dividend of $1.55 per share. If the required return is 12 percent, what is the price of the stock today?
You are analyzing a project and have developed the following estimates: unit sales = 2,150, price per unit = $84, variable cost per unit = $57, fixed costs per year = $13,900. The depreciation is $8,300 a year and the tax rate is 35 percent. What eff..
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