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Fama French 5 Factors Method – RoyalCustomEssays

Fama French 5 Factors Method

Stack Brewing
November 20, 2018
Data Structure
November 20, 2018
0

Part 1. Univariate Statistics.

The data below was obtained from Professor Kenneth French’s data library website:

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

The table below contains monthly returns of the “Fama/French 5 Factors” and the monthly returns of the “Momentum factor” for the period from July 1963-December 2017 (654 months)

(Double click on the window to access the data on the excel spreadsheet)

  • RM-RF The return spread between the capitalization weighted stock market and cash.
  • SMB The return spread of small minus large stocks (i.e., the size effect).
  • HML The return spread of cheap minus expensive stocks (i.e., the value effect).
  • RMW The return spread of the most profitable firms minus the least profitable.
  • CMA The return spread of firms that invest conservatively minus aggressively.
  • MOM The retun spread of firms with high prior return minus low prior return.

 

Split the sample in 3 equal periods and compute the average, SD, skew, and kurtosis for each of the six “risk factors” for the full sample and the three different periods. Arrange these values in a table similar to the one shown below. (5p)

 

Full Sample: 1963M07 – 2017M12
  MKT_RF SMB HML RMW CMA MOM
 Mean 0.531 0.250 0.345 0.250 0.287 0.659
 Std. Dev. 4.388 3.025 2.809 2.213 2.005 4.194
 Skewness -0.542 0.380 0.077 -0.309 0.294 -1.341
 Kurtosis 2.048 3.237 2.126 12.771 1.657 10.754
 Observations 654 654 654 654 654 654
First sub-sample: 1963M07 – 1981M08
             
 Mean 0.218 0.568 0.438 0.014 0.258 0.845
 Std. Dev. 4.419 3.263 2.607 1.617 2.027 3.698
 Skewness -0.108 0.208 -0.176 0.081 0.015 -0.459
 Kurtosis 1.175 1.190 1.837 0.248 0.909 2.616
 Observations 218 218 218 218 218 218
Second sub-sample: 1981M09 – 1999M10
  MKT_RF SMB HML RMW CMA MOM
 Mean 0.895 -0.228 0.342 0.340 0.302 0.874
 Std. Dev. 4.381 2.570 2.513 1.443 1.865 2.957
 Skewness -0.929 0.165 0.274 -0.035 -0.240 -0.554
 Kurtosis 4.403 0.905 -0.034 0.178 0.577 0.997
 Observations 218 218 218 218 218 218
Third sub-sample: 1999M11 – 2017M12
  MKT_RF SMB HML RMW CMA MOM
 Mean 0.480 0.412 0.256 0.396 0.301 0.259
 Std. Dev. 4.358 3.149 3.257 3.154 2.123 5.502
 Skewness -0.618 0.524 0.143 -0.429 0.901 -1.433
 Kurtosis 1.030 6.309 2.618 8.365 2.883 9.287
 Observations 218 218 218 218 218 218

 

  1. Do the statistics suggest to you that returns for those risk factors come from the same distribution over the entire period? (5p)

 

  1. Which factor portfolio gives the lowest and highest future value (full sample)? (5p)

 

  1. Which factor portfolio gives the lowest and highest future value (over the five-year period (Jan 2013 – Dec 2017). )? (5p)

 

  1. Give a brief explanation of what are the real, macroeconomic, aggregate, nondiversifiable risk that are proxied by the returns of the [RM-RF], SMB, HML, RMW, CMA and MOM risk portfolios. For example, why are investors so concerned about holding stocks that do badly at the times that the HML (value less growth) and SMB (small-cap less large-cap) portfolios do badly, even though the market [RM-RF] does not fall? (5p)

 

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