Finance Case 2
Finance Theory I – Case 2
Tracy Hsiao, Baltic Ocean
Evaluation of AQR Momentum Funds Date: Dec. 5th, 201r
Past performance of momentum strategies – CAPM & Fama‐French MOM 4 factors model
In Table 1, we could evaluate the past performance of momentum strategy, Short Decile 1 and Long Decile 10, a.k.a. L/S (10‐1).
Capital Asset Pricing Model (CAPM)
E(R) = α + Rf + β (RM - Rf) +
By applying to CAPM, we got a β that is almost zero (-0.08) showing the strategy could effectively diversify and reduce the market risk with stocks in Decile 1 and Decile 10. To further explain the large excess return (α), we then apply Fama-French MOM Four Factors Model.
Fama‐French MOM Four Factors Model
E(R) = α + Rf + β (RM - Rf) + βs ∙ SMB + βh ∙ HML + βu ∙ UMD +
In order to explain further on the excess return from market risk, we applied the past data to Fama-French MOM Four Factors Model to consider not just market factor (RM - Rf), but also size factor (SMB), value factor (HML), and momentum (UMD). The high βu (1.43) indicates the premium we could get from momentum factor. And the high excess return (α = 3.24) suggests the high return we could benefit additional from the risk premium. And therefore, we can expect a significantly greater than zero return the next decade with L/S (10‐1) strategy.
Benchmarks recommendation and performance evaluation
UMD index and the US Russell 1000 can be the appropriate benchmarks.
The AQR Momentum Funds would probably not perform better than UMD because it could not perform short position and rebalance the stock frequently because of the transaction costs.
On the other hand, because all three separate long-only momentum indexes – the large-cap US momentum index, the small-cap momentum index, and the large-cap international momentum index – that AQR developed outperformed Russell 1000 since 1980. It’s very likely AQR Momentum Funds can perform better than Russell 1000 as well.
Would momentum be an attractive product?
According to the
Tracy Hsiao, Baltic Ocean
Evaluation of AQR Momentum Funds Date: Dec. 5th, 201r
Past performance of momentum strategies – CAPM & Fama‐French MOM 4 factors model
In Table 1, we could evaluate the past performance of momentum strategy, Short Decile 1 and Long Decile 10, a.k.a. L/S (10‐1).
Capital Asset Pricing Model (CAPM)
E(R) = α + Rf + β (RM - Rf) +
By applying to CAPM, we got a β that is almost zero (-0.08) showing the strategy could effectively diversify and reduce the market risk with stocks in Decile 1 and Decile 10. To further explain the large excess return (α), we then apply Fama-French MOM Four Factors Model.
Fama‐French MOM Four Factors Model
E(R) = α + Rf + β (RM - Rf) + βs ∙ SMB + βh ∙ HML + βu ∙ UMD +
In order to explain further on the excess return from market risk, we applied the past data to Fama-French MOM Four Factors Model to consider not just market factor (RM - Rf), but also size factor (SMB), value factor (HML), and momentum (UMD). The high βu (1.43) indicates the premium we could get from momentum factor. And the high excess return (α = 3.24) suggests the high return we could benefit additional from the risk premium. And therefore, we can expect a significantly greater than zero return the next decade with L/S (10‐1) strategy.
Benchmarks recommendation and performance evaluation
UMD index and the US Russell 1000 can be the appropriate benchmarks.
The AQR Momentum Funds would probably not perform better than UMD because it could not perform short position and rebalance the stock frequently because of the transaction costs.
On the other hand, because all three separate long-only momentum indexes – the large-cap US momentum index, the small-cap momentum index, and the large-cap international momentum index – that AQR developed outperformed Russell 1000 since 1980. It’s very likely AQR Momentum Funds can perform better than Russell 1000 as well.
Would momentum be an attractive product?
According to the