FRM Part II · FRM Exam Part II · Factors
A risk analyst regresses the monthly excess return of an equity fund on the market excess return (MKT), the size factor (SMB) and the value factor (HML) from the Fama-French three-factor model. The fund shows a statistically significant negative loading on HML. Which interpretation is most appropriate?
A significantly negative HML loading means the fund behaves like growth stocks, which have low book-to-market ratios. HML is long value and short growth, so a negative exposure indicates a growth tilt. It says nothing about size, which SMB captures, or about market beta.
- AThe fund tilts toward growth stocks with low book-to-market ratiosCorrect
- BThe fund tilts toward value stocks with high book-to-market ratios
- CThe fund holds mainly large-capitalization stocks
- DThe fund has a market beta below zero
Explanation
HML is long high book-to-market (value) stocks and short low book-to-market (growth) stocks. A negative loading means the fund behaves opposite to this portfolio, so it is tilted toward growth stocks. Size exposure is measured by SMB, and market beta by the MKT loading, not HML.
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