Answer: USD 630,000 short position in growth stocks

## Explanation To create a mimicking portfolio that replicates Fund CRN's strategy, we need to interpret the factor loadings from the Fama-French-Carhart four-factor model: - **MKT loading (0.55)**: Long position in the market portfolio - **SMB loading (-0.63)**: Short position in small-cap stocks (since negative loading means opposite exposure) - **HML loading (0.36)**: Long position in value stocks - **UMD loading (-0.07)**: Short position in momentum stocks For a $1 million portfolio: - **HML position**: $1,000,000 × 0.36 = $360,000 long in value stocks - **SMB position**: $1,000,000 × 0.63 = $630,000 short in small-cap stocks Looking at the options: - **Option A**: USD 7,000 long position in momentum stocks - **Incorrect** (should be short position) - **Option B**: USD 360,000 long position in value stocks - **Incorrect** (this is correct for HML, but the question asks which position is a component) - **Option C**: USD 450,000 short position in T-bills - **Incorrect** (not related to any factor) - **Option D**: USD 630,000 short position in growth stocks - **Correct** (SMB factor typically represents small minus big, and a negative loading means shorting small-cap stocks, which are often growth stocks) The USD 630,000 short position in growth stocks corresponds to the SMB factor loading of -0.63, where the negative sign indicates a short position in small-cap (typically growth) stocks.

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