Assignment on Fama and French Model

Assignment on Fama and French Model
Answer 1
Refer Excel
Answer 2 part a
For Small Minus Big and High minus Low factors, Fama and French model is constructed in
the following manner:
The stocks in a region are sorted in two market cap and three book to market equity groups at
the end of a particular period. Big stocks are generally in the top 90% of the end period
market cap for the region, small caps are generally in the bottom 10% of the market cap for
the region. The Book to Market Equity breakpoint generally for a region lies between the 30th
percentile and 70th percentile for the large cap stocks.
The developed portfolios use different type of size breaks instead of book to market equity.
The small minus big portfolio is the equal weighted average of the returns on the three small
stocks portfolios for the region chosen as reduced by the equal weighed average return of the
three big stock portfolios.
SMB = 1/3 (Small Value + Small Neutral + Small Growth) – 1/3 (Big Value + Big Neutral +
Big Growth).
On the other hand High Minus Low, represents the equal weighted average return for the two
high Book to Market portfolios for the chosen region as reduced by the average of the returns
for the two low Book to Market portfolios.
HML = 1/2 (Small Value + Big Value)– 1/2 (Small Growth + Big Growth).
Answer 3 part A
Market Risk Premium
Small Minus
Big
High Minus
low
Beta Beta Beta
Firm Alpha
t
(Alpha) MRP t (MRP) SMB t (SMB) HML t (HML)
RE
0.00903369
8
0.91498
5 0.152972437
0.60266
1 -0.18966
-
0.46727 0.285132
0.37281
5
EVRG
0.00621011
4
0.88673
4 0.04347452
0.24145
7 0.048794
0.16947
8 0.049636
0.18769
3
ES
0.01012882
3
1.49747
7 0.372486266
2.14201
7 -0.57878
-
2.08143 0.127129
0.49774
2
EXC
0.00725301
7
1.02705
7 0.236518076
1.30272
2 0.140933
0.48544
3 0.029617
0.11106
4
EXPE
-
0.00634392
-
0.43502 0.863803199
2.30398
3 0.04634
0.07729
6 0.438418
0.79615
9
EXPD
0.00915267
2
1.06790
1 0.981737049
4.45543
2 0.716859
2.03454
5 0.592716
1.83142
1
EXR
0.01147323
3
1.22461
2 0.019066346
0.07915
7 0.152598
0.39619
8 -0.04933
-
0.13945
XOM
-
0.00831563
0.00716
3 1.021963945
5.54919
6 0.563958
1.91504
9 0.513569 1.89863
FFIV
-
0.00669813
-
0.60899 1.007462561 3.56284 0.304748
0.67397
9 0.385867
0.92907
8
FB 0.00009
0.00765
9 1.327126606
4.21109
3 0.222955
0.44242
4 -0.45848
-
0.99048
FAST
0.00622664
7 0.53696 1.387813764
4.65511
7 0.089445
0.18762
6 0.491719
1.12295
7
FRT
-
0.00061313
-
0.07324 0.449415792
2.08807
8 0.458543
1.33234
8 0.367127
1.16134
5
FDX
-
0.01953432
-
1.98774 1.695313916
6.70999
4 0.04428
0.10960
1 0.182985
0.49309
9