Part 1: Evaluating Value-Growth For this part of the assignment, you will need to use the HML factor and market excess returns from HW1Bdata.xlsx (in the sheet labeled “Fama-French Factors”). The HML...

Part 1: Evaluating Value-Growth

For this part of the assignment, you will need to use the HML factor and market excess returns from HW1Bdata.xlsx (in the sheet labeled “Fama-French Factors”). The HML factor is the difference in returns between the high book-to-market portfolio and the low book-to-market portfolio.

1. 
   

   Report the average of HML. What is the standard error of this estimate? What is the 95% confidence interval? Is the average of HML statistically different from 0?
   

   
   


2. 
   

   Report the CAPM beta and alpha of the HML portfolio. Are these estimates statisti- cally significant? What are the possible economic sources of this alpha?
   

   
   


3. 
   

   Are the results in (1) or (2) better evidence that a strategy that is long value and short growth generates abnormal returns? Why?
   

   
   

Part 2: Mystery Portfolios

For this part of the assignment, use the returns for the mystery mutual funds in HW1Bdata.xlsx. In the sheet labeled “Mystery Funds”, there are returns for three different mutual funds. The funds are:

(a) iShares S&P 500 Value Index (IVE) – Large Value
(b) iShares S&P Growth Index (IVW) – Large Growth
(c) iShares Russell 2000 Growth Index (IWO) – Small Growth

1

1. 
   

   Report the average excess returns of each of the three funds with a 95% confidence interval.
   

   
   


2. 
   

   Run multivariate regressions of the excess returns of these mystery funds on the three Fama-French factors and report the estimates (with t-statistics).
   

   
   


3. 
   

   Based on the results of the multivariate regressions, identify which fund is which.
   

   
   


4. 
   

   Suppose that we believe that the Fama-French 3-factor model properly captures risk. Do the results in (2) indicate that any of the fund managers have an ability to generate returns in excess of the risks that they are taking on?