Question

1. 
   13. This regression output is used in estimating the Fama- French 3 factor model. Use it to answer the following questions: Regression Statistics Multiple R 0.793 R Square 62.8% Adjusted R Square 61.7% Standard Error 2.830 Observations 103 ANOVA F 3 SS 1 340.7 793.2 2133.8 MS 446.9 8.0 Significance F. 0.0 Regression Residual Total 55.8 99 102 Intercept Mkt-RF SMB HML Coefficients -0.043 0.875 0.074 -0.087 Standard Errort Stat 0.280 -0.152 0.083 10.489 0.200 0.370 0.165 -0.529 P-value 0.880 0.000 0.712 0.598
   
   1. Use the info to create the model's equation.

Mkt-RF	SMB	HML	RF	S&P 500	NASDAQ
1.250	-0.940	-0.560	0.100	1.441	0.015

Find Expected return given the following market performance

c. What is SMB and MHL in this model?

Answer 1

Solution :

a) R ​= α​+β1​(Mkt-RF​) + β2​(SMB)​ + β3(​HML)

= -0.043 + 0.875(Mkt-RF) + 0.074(SMB) + (-0.087)(HML)

= -0.043 + 0.875(1.250) + 0.074(-0.940) + (-0.087)(-0.560)

= -0.043 + 1.0937 - 0.0695 + 0.0487

= 1.0299

The expected return from the given market performance will 1.0299

b) SMB and HML are the risk factor, which helps to predict Mkt-RF more significantly. Because of these two factors the alpha i.e. intercepts get disappear and it is no longer statistically significant at conventional levels.