Market neutral

[ckyeh]

Dear David:

On webnair 「2010-8-b-Investment」, page 15:
r-Rf = β3(Km-Rf)+bs*SMB+bv*HML+α
I could understand what SMB and HML represent, but what isβ3(Km-Rf)?
And where is UMD?

Thanks for your help!

 

[David Harper CFA FRM]

Hi ckyeh,

Good catch (that I plain missed)!
The formula displayed at bottom: r-Rf = β3(Km-Rf)+bs*SMB+bv*HML+α
Is the Fama-French three-factor model:
http://en.wikipedia.org/wiki/Fama–French_three-factor_model

Shown there because previously Amen Chapter 6 was FRM assigned, and that was the FF three-factor model (page 159)

But the Jaeger Hedge fund chapter gives the three factors as: SMB, HML and UMD (momentum).

This term: β3(Km-Rf) is analogous to CAPM
Beta3 is exposure to excess market return factor

So I guess Jaegaer (technically) refers to a four factor model, MRP + SMB + HML + UMD; unless, it is three factors without the MRP. I'm not sure b/c he doesn't articulate the formula (I retained it over from previously assigned Amenc Ch 6 on APT)…. in either case, we have E(r) = exposure * factor + exposure * factor + ...

David