Explanation:
D is correct. The two Fama-French factors, SMB and HML, are factors that measure size and value-growth exposures, respectively. The SMB factor measures the outperformance of small-capitalization stocks versus large-capitalization stocks. A positive SML coefficient indicates that the portfolio is moving together with small cap stocks and a negative SML coefficient indicates that the portfolio is moving together with large cap stocks. The HML factor measures the outperformance of value stocks versus growth stocks. A positive HML coefficient indicates that the portfolio is moving together with value stocks and a negative HML coefficient indicates that the portfolio is moving together with growth stocks. In this question, based on the regression results, the SMB coefficient has a positive value, which means there is a positive correlation between portfolio return and SMB, and the HML coefficient has a negative value, which means there’s a negative correlation between portfolio return and HML.
We can rule out B and C.
A is incorrect because, as mentioned above, a positive SML coefficient indicates that the portfolio is moving together with small cap stocks.
Ultimate access to all questions.
No comments yet.
| Alpha | 0.10 |
|---|---|
| Market coefficient | 0.52 |
| SMB coefficient | 0.18 |
| HML coefficient | -0.70 |
Assuming all estimated coefficients are statistically significant, which of the following is correct?
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.