FRM Part II · FRM Exam Part II · Factors
A portfolio manager estimates a three-factor Fama-French regression for a fund's excess returns and obtains a loading of +0.45 on SMB and -0.30 on HML. Which interpretation is most consistent with these results?
A positive SMB loading means exposure to small-cap stocks, and a negative HML loading means exposure to low book-to-market growth stocks. The fund is therefore small-cap and growth tilted, since SMB is small minus big and HML is high minus low.
- AThe fund tilts toward small-capitalization stocks and toward growth (low book-to-market) stocksCorrect
- BThe fund tilts toward large-capitalization stocks and toward value (high book-to-market) stocks
- CThe fund tilts toward small-capitalization stocks and toward value (high book-to-market) stocks
- DThe fund tilts toward large-capitalization stocks and toward growth (low book-to-market) stocks
Explanation
SMB is small minus big, so a positive loading indicates a small-cap tilt. HML is high minus low book-to-market, so a negative loading indicates a tilt toward low book-to-market growth stocks. The value-tilt options reverse the sign of the HML loading.
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