Summary Answer_case_55_Suggested_Questions_for_M

Summary Multifactor Models : 1. To evaluate the performance of four mutual funds. 2. To estimate the cost of capital for two firms Benchmarking Both parts of the exercise are about choosing an appropriate benchmark, either for evaluating post investment returns or assessing a new project. A benchmark should reflect the opportunity cost, or the best alternative investment. Under the assumptions of the capital asset pricing model (CAPM), diversified investors use the following formula to benchmark performance : Rf + β (Rm – Rf) Rf : risk-free rate of returned, (Rm – Rf) : return on the market portfolio in excess of the risk free rate, β : the slope coefficient in a regression of firm or fund returns in excess the risk-free rate on Rm – Rf Fama-French 3- factors Model, which adds two “factors” to the CAPM Rf + β (Rm – Rf) + hHML + sSMB HML (High Minus Low) book-to-market ratio, SMB ( Small Minus Big) market capitalization are to measure the relative returns of stocks with high and low ratios of book-market value and with high and low market capitalization. 4-Factor Model, which adds stock price momentum in addition to HML and SMB. Rf + β (Rm – Rf) + hHML + sSMB + mMOM MOM is a portfolio that measures the relative returns of stocks with high and low returns in the past ear. Suggested Questions for Multifactor Model For the first set of questions, you will be evaluating the performance of 4 mutual funds. In the second part, you will be estimating the cost of capital for two firms. PART A 1. For each of the following ,determine a benchmark (from the case) and justify your choice: · T Rowe Price Blue Chip Growth (TRBCX) · Goldman Sachs CORE Large Cap Growth (GLCGX) · Diversified Special Equity Inv (DVPEX) · DFA Tax-Managed U.S. Small Cap Value (DTMVX)....