FRM Part II · FRM Exam Part II · Factors
A portfolio manager regresses a fund's monthly excess returns on the market excess return, SMB and HML in a Fama-French three-factor model. The fund has an HML loading of -0.45 and an SMB loading of 0.10. Which style description is most consistent with these estimates?
The fund is growth-tilted with a slight small-cap tilt. A negative HML loading means it behaves like low book-to-market growth stocks, while the small positive SMB loading of 0.10 shows only a marginal tilt toward small-cap stocks.
- AA growth-tilted fund with a slight small-cap tiltCorrect
- BA value-tilted fund with a strong small-cap tilt
- CA value-tilted fund with a large-cap tilt
- DA growth-tilted fund with a strong large-cap tilt
Explanation
A negative HML loading means the fund behaves like growth stocks (low book-to-market) rather than value stocks. A small positive SMB loading of 0.10 indicates only a slight small-cap tilt. Options describing value tilt misread the sign of HML, and a strong large-cap tilt would require a clearly negative SMB loading.
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