What Is The Difference Between Simple And Dynamic Investment Factors (I.E. What Trading Strategy Is Required To Capture The Risk Premium)?

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QUESTION 1

1.       What is the difference between simple and dynamic investment factors (i.e. what trading strategy is required to capture the risk premium)? Is the market portfolio exposed to any dynamic factors?

3 points    

QUESTION 2

1.       What two dynamic factors do Fama and French add to the standard CAPM? How could you create a factor mimicking portfolio for each of these two factors (i.e. what long and short position would you need to take)?

3 points    

QUESTION 3

1.       Does the disappearance of the size effect signal that it was spurious (i.e. firm size was never a risk factor and its premium observed prior to 1980s happened purely by chance) or does it signal a near-efficient market in which practitioners quickly exploit any anomaly?

3 points    

QUESTION 4

1.       What is the momentum factor? How could you construct a factor mimicking portfolio for the momentum factor?

3 points    

QUESTION 5

1.       Do value and momentum investing strategies require periodic rebalancing? If so, when is more frequent rebalancing likely to be necessary: when market volatility is high or when it is low

 

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