Homework4

Homework 4

1: (Posted in the problem sets for chapter 9) Chapter 11 questions: 7, 9, 14, 19.

2. (Chapter 12 CFA problems 4) During an interview with her investment adviser, a retired investor made the following two statements: (a) “ I have been very pleased with the returns I’ve earned on Petrie stock over the past 2 years and I am certain that it will be a superior performer in the future.” (b) “ I am pleased with the returns from the Petrie stock because I have specific uses for that money. For that reason, I certainly want my retirement fund to continue owning the Petrie stock.” Identify which principle of behavioral finance is most consistent with each of the investor’s two statements.

3. Go to http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data library.html and download the following portfolios: ∙ Download the FF three factors based on monthly value-weighted returns. ∙ Click on “Portfolios Formed on Book-to-Market” and download the ten value-weighted book-tomarket portfolios (monthly returns). These are the portfolios in the last ten columns (from Lo 10 to Hi 10). Keep only the 1st, 5th, and 10th portfolio. ∙ Click on “10 Portfolios Formed on Momentum ” and download the ten momentum portfolios (monthly returns). Keep only the 1st, 5th, and 10th portfolio. (1) For the three book-to-market portfolios, calculate the following for the postwar period: 19722007: (a) CAPM alpha and beta (with t-statistics); comment on the alpha and beta trends across portfolios. (b) Alpha and coefficients (with t-statistic) with MKT, SMB, and HML included in the regressions; comment on the alpha and beta trends across portfolios. 1

(2) For the three momentum portfolios, calculate the following for the postwar period: 1972-2007: (a) CAPM alpha and beta (with t-statistics); comment on the alpha and beta trends across portfolios. (b) Alpha and coefficients (with t-statistic) with MKT, SMB, and HML included in the regressions; comment on the alpha and beta trends across...