CFA Practice Question

There are 57 practice questions for this study session.

CFA Practice Question

In the Fama-French model, the HML factor represents the mean return from:
A. shorting the low P/B shares and investing the proceeds in high P/B shares.
B. shorting the high P/B shares and investing the proceeds in low P/B shares.
C. investing 50% in low P/B shares and another 50% in high P/B shares.
Explanation: Each of the factors can be seen as the mean return to a zero-net investment, long-short portfolio.

User Contributed Comments 7

User Comment
tscott2 Notes indicate that it is the premium of high book / price, here it is price / book.
pjdeschenes The theory is that low P/B stocks have higher returns, all else equal. So you'd want to be long low P/B and short high P/B.
MattNYC Wouldn't you want to short the high P/B?? B is correct.
NillePet HML stands for - "high minus low" (BV/P), thus implicating that value stocks (high BV/p) have excess return over the market.
Hence the answer is should be A. Similarly SMB stands for "small minus big" (size premium- small capitalization stocks outperform big capitalization stocks). You would sell big short and buy small.
paolino9290 right answer is definitely B - it does not mention BV/P, but it's reciprocal P/BV - hence you should follow the opposite strategy
richmondo Yes - didn't notice it was the reciprocal - tricked!
Profache If the P/BV ratio is high, market price is high, showing overvaluation. Sell overvalued asset (high P/BV) and buy undervalued asset (low P/BV)
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