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Answer: There is a negative correlation between portfolio return and the value factor, which indicates that the portfolio moves together with growth stocks.
The correct answer is D. The Fama-French three-factor model includes SMB (Small Minus Big) and HML (High Minus Low) as factors that measure the size and value-growth exposures, respectively. In the provided regression results, the SMB coefficient is positive (0.18), which indicates a positive correlation between the portfolio return and the size factor, meaning the portfolio tends to move with small-cap stocks rather than large-cap stocks. The HML coefficient is negative (-0.70), indicating a negative correlation between the portfolio return and the value factor, which means the portfolio is more aligned with growth stocks than value stocks. Therefore, option D is correct as it states there is a negative correlation between portfolio return and the value factor, indicating that the portfolio moves together with growth stocks. Options A and C are incorrect because the positive SMB coefficient actually indicates a positive correlation with small-cap stocks, not large-cap stocks. Option B is incorrect because the negative HML coefficient indicates a negative correlation with value stocks, not a positive one.
Author: LeetQuiz Editorial Team
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As a risk analyst evaluating an investment portfolio using the Fama-French three-factor model, assume you have obtained regression results that show statistically significant coefficients. How should you accurately interpret the following coefficients from your analysis: Alpha (0.10), Market (0.52), SMB (0.18), and HML (-0.70)?
A
There is a positive correlation between portfolio return and the size factor, which indicates that the portfolio moves together with large-cap stocks.
B
There is a positive correlation between portfolio return and the value factor, which indicates that the portfolio moves together with growth stocks.
C
There is a negative correlation between portfolio return and the size factor, which indicates that the portfolio moves together with large-cap stocks.
D
There is a negative correlation between portfolio return and the value factor, which indicates that the portfolio moves together with growth stocks.
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