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Answer: USD 360,000 long position in value stocks
## Explanation The mimicking portfolio should consist of the following positions (in percentages): - **(1 - 0.55) = 45% in T-bills** (risk-free asset) - **+ 55% in the market portfolio** (MKT factor) - **- 63% in small caps + 63% in large caps** (SMB factor - negative loading means short small caps/long large caps) - **+ 36% in value stocks – 36% in growth stocks** (HML factor - positive loading means long value/short growth) - **- 7% in past winning stocks + 7% in past losing stocks** (UMD factor - negative loading means short winners/long losers) For a USD 1 million portfolio: - The 36% long position in value stocks translates to **USD 360,000** - The 7% long position in past losing stocks would be USD 70,000 (not USD 7,000) - The 45% position in T-bills would be USD 450,000 long (not short) - The 63% short position in small caps would be USD 630,000 (not growth stocks) Therefore, option B is correct as it accurately represents the 36% long position in value stocks (USD 360,000) from the HML factor loading of 0.36.
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An individual investor reviews historical data on the performance of several investment funds and decides to create a USD 1 million portfolio that mimics the strategy of Fund CRN, which has consistently generated high alphas. The investor gathers Fund CRN's monthly returns over the last 10 years and regresses Fund CRN's monthly excess returns over the risk-free rate against the Fama-French model's three factors as well as a momentum factor. The investor obtains the following statistically significant estimates:
| Coefficient | T-statistic | |
|---|---|---|
| Alpha | 0.08 | 2.10 |
| MKT loading | 0.55 | 6.72 |
| SMB loading | -0.63 | 4.35 |
| HML loading | 0.36 | 3.20 |
| UMD loading | -0.07 | 2.77 |
| Adj R² | 0.56 |
Which of the following positions is a component of the mimicking portfolio?
A
USD 7,000 long position in stocks showing positive momentum
B
USD 360,000 long position in value stocks
C
USD 450,000 short position in T-bills
D
USD 630,000 short position in growth stocks
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