Why do we not subtract the risk-free rate from smb or hml

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Reference no: EM131881726

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

Reference no: EM131881726

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