. Compare the returns of the two selected funds for the past 10 years. Determine whether...
. Compare the returns of the two selected funds for the past 10 years. Determine whether you believe that the Fama-French (FF) three-factor model should or should not be rejected. Explain why or why not.
Homework Answers
Answer: I am taking two mutual funds:
Vanguard 500 Index fund's Net Asset Value (NAV) = $277.55
Fidelity Index fund's Net Asset Value (NAV) = $103.80
10 years return:
Vanguard 500 Index fund = 14.54%
Fidelity Index fund = 14.69%
Both are index funds and both provide higher returns, both have four star ratings.
Fama-French (FF) three-factor model- This model is an extension of CAPM. This model takes into account the three factors while describing stock returns-
- Market risk
- Out performance of small cap companies relative to large companies
- Out performance of high book to market companies versus low book to market companies.
This models tells that small cap value stocks perform very well in the stock market. It added the size risk and model risk in the CAPM.
This model should be rejected because it does not explain the low average returns of small stocks and this model cannot be implemented in real world. This model ignores low volatility and momentum.
Add Answer to:
. Compare the returns of the two selected funds for the past 10
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