Explanation:
The fund has more exposure towards small stocks. The regression equation provided in the question is a representation of the Fama-French three-factor model. This model is widely used in finance to describe stock returns. It includes three factors: the market risk premium , the size premium (SMB), and the value premium (HML). The size premium, SMB, is calculated by going long on small companies and short on large companies. Therefore, a positive SMB coefficient indicates that the fund has more exposure to small companies compared to large companies. In this case, the SMB coefficient is 0.32, which is positive. Therefore, it can be concluded that the fund has more exposure towards small stocks.
Choice A is incorrect. The fund does not have more exposure towards large stocks. The coefficient of SMB (Small Minus Big) in the regression equation is positive, indicating that the fund has more exposure to small-cap stocks rather than large-cap stocks.
Choice C is incorrect. The fund does not have equal exposure towards both small and large stocks. As explained above, the positive SMB coefficient suggests a greater tilt towards small-cap stocks.
Choice D is incorrect. The statement that the fund has 100% exposure towards large stocks is inaccurate as per the regression results which indicate a significant positive loading on SMB (small minus big), suggesting an inclination towards smaller companies rather than larger ones.
Ultimate access to all questions.
No comments yet.
Q.2423 A large investment management firm manages multiple funds. It re-launches one of its best performing funds to attract new investors. John Grey, a prospective investor in the fund, goes through the fund factsheet. In the factsheet, the investment management firm states that the fund invests in large value stocks. To verify the correctness of this assertion, Grey plans to leverage the skills he’s learned from his Finance undergraduate classes. Grey regresses the fund return against the market and a few other factors. The results areas presented below:
Which of the following statements is correct?
A
The fund has more exposure towards large stocks.
B
The fund has more exposure towards small stocks.
C
The fund has equal exposure towards both small and large stocks.
D
The fund has 100% exposure towards large stocks.