You work at a fund-of-fund and your supervisor has assigned you to study the performance of a particular fund that your company is consider investing. You decided to use this fund’s past monthly performance (Rt) and estimate the Fama-French-Carhart model. The following regression is your estimation result: Rt = 0.03 + 1.5*(RM - Rf) – 0.7*SMB+0.09*HML+0.6*PR1YR+et,
where RM is the monthly aggregate stock market return, Rf is the risk-free rate, et is the regression error term.
(a) From the factor loadings (factor coefficients), what are the attributes of stocks this fund like to invest?
(b) Does the manager of this fund appear to have investing skills?
IV- What is the momentum anomaly in the stock market? How would you design a trading strategy to exploit this anomaly? Specifically, what stocks will you long and short?