Question

The Fama-French three-factor model adds to the CAPM factors that reflect these empirical regularities:

A. Steady earnings and predictable investment patterns each earn higher returns.

B. Stocks earn higher returns that have high debt/asset ratios and low P/E ratios.

C. Large-cap returns lag small-cap stock returns and low book-to-mkt returns lag high book-to-mkt returns.

D. High-beta stocks earn negative alpha, on average, and low-beta stocks earn positive alpha.

A well-documented anomaly consistent with trader loss aversion is …

A. buying homeowners insurance and also buying lottery tickets.

B. investing too little over one’s lifetime due to mental accounting.

C. the tendency to sell winners too soon and ride losers too long.

D. post earnings announcement drift that leaves positive cumulative abnormal returns to harvest.

Answer 1

Answer 1:Fama french model is additive model to CAPM model which considers size premium and value premium along with market risk premium.

Therefore formula for Expected return is = Rf+MRP*B1+SMB*B2+HML*B3

Where Rf= risk free rate

MRP= market risk premium

SMB= size premium (small - big)

HML= value premium (High minus low)

B1,B2, B2= Beta or sensitivity.

Therefore Option C is correct answer.

Solution2: Risk averse person is one who usually invest low in stock due to low risk appetite and therefore B is correct option.