ased on Exhibit 1, the manager could have delivered more value to the portfolio
during the investment period by weighting more toward:
A. value stocks.
B. small-cap stocks.
C. momentum stocks.
Answer was C. I don’t think I am interpreting this correctly. Momentum stocks were positive. My answer was A. If the manager had geared portfolio towards value he could have generated a positive return. Because he geared towards growth stocks it was negative. Why isn’t the answer C. Confused about why C is the answer here.
The factor return for both value and small stocks are negative, if you increased weights for them ,you would have a negative results - so ypu are better off increasing weights to momentum stocks
Also considering you titled carhart interpretation. Quick summary
RMRF is 1.22 - it has higher beta, higher volatility than market
SMB - postive = Small cap biased
HML - Postive = Growth biases
WML - postive = Momentum biased
To answer this question you ar ejust looking a column (4)
Only one factor has +ve contribution : momentum
Adding weight to momentum would help.
Other things we could have done.
SMB (small cap) - In this period return to small cap is negative. The portfolio was underweight so good but they could have increased returns by being more underweight snall cap or overweight large cap stocks
HML (value/growth) - In this period return to value is negative. The portfolio was underweight so good but they could have increased returns by being more underweight value or overweight growth stocks.
the question i have is do those negative % under “proportion of active return” matter? i know the solution implies negative signs don’t matter but i’d like to understand why.
The issue in understanding them, as in the case, is when the overall relative performance is negative.
Meaning a “negative” number in this column was actually when there wasa positive contribution, ie. being underweight small cap when it underperformed was +ve for returns but shows as a negatve.
the opposite is case for a positve number.
You have to interpret them in the context of if the overall performance was +ve or -ve.
Right, my bad.
I remember that when driving in car and we see something interesting - as Beta I say - please buy that product for me in Market- it’s of Small Value, Mom.
Car = Carhart Model
Beta (son) = RMRF
SMB = Small
HML = Value
WML = Momentum
