Reference no: EM132743682
Question - An investment firm uses the Carhart-Fama-French Model to track the performance of the portfolio managers in the firm. In 2019, the risk-free rate of return was 2.2% and the return on the S&P 500 (a proxy for the total market) was 28.9%. An actively managed large cap portfolio earned 32.8%, while the benchmark portfolio it was compared to earned 31.2%. The betas for the benchmark portfolio and the actively managed portfolio are:
Betas Risk Factor benchmark portfolio managed portfolio factor return
Market risk (RMRF) 1.00 1.05 ?
Small cap stocks (SMB) -0.50 -0.70 -5.90%
Value stocks (HML) 0.20 0.40 -6.35%
Momentum stocks (WML) 0.10 0.20 6.44%
Required -
a. What is the active return on the managed portfolio?
b. What is the factor return for market risk (RMRF)?
c. What proportion of the active return is due to the market risk tilt?
d. What proportion of the active return is due to the large cap stocks tilt (the tilt away from small cap stocks)?
e. What proportion of the active return is due to the value stocks tilt?
f. What proportion of the active return is due to the momentum stocks tilt?
g. What proportion of the active return is due to the manager's selection of individual stocks?
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