Question 8 (9 points)- Consider the following excel output from a Fama-French th

Question

Question 8 (9 points)- Consider the following excel output from a Fama-French three-factor model regression for a stock Coefficients 0.685-a 1,578-? 0.209 13839 Standard Error 0.993 0.224* 0.446* 0.378 T-stat 0.690a 7.056 0.468+ 3.657 P-value- 0.493 0.000p 0.642 0.001a Intercept- Marketo HML (1) What is the estimated alpha for this stock? Is it statistically significant? Explain (2) Are the estimated betas statistically significant from zero? Explain each beta estimate separately. (3) Given the beta estimates, describe the risk characteristics of this stock. Is the stock cyclical? Is it a large or small stock? Is it a value or growth stock? Explain.

Explanation / Answer

1) The estimated alpha for the stock is 0.685. It is not statistically significant. The p value is 2*0.493 =0.986 which indicates that the smallest level of significance for which the null hypothesis can be rejected is 98.6 % level of significance. Even the low t value of 0.69 suggests that the null hypothesis that alpha is not statistically different from zero cannot be rejected.

2) Market Beta and SMB betas of 1.578 and 1.383 are statistically different from zero. There low p values of 2*0 =0 and 2* 0.001=0.002 suggest this along with high t statistic of 7.056 and 3.657. However, beta of HML is not statistically different from zero.

3) HML component is High – Low Book Value Premium. A positive value indicates that this is a value stock.Similarly a negative beta for size (SMB) indicates that this is large cap stock. Similarly the beta component of 1.578 (greater than 1) suggests that this is a cyclical stock.

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