BA 443
Exercise 3 (Excel only)
Multifactor Models
Due date: Friday, February 13, 4 p.m.
You can choose to work with your Stock-trak partner(s) or by yourself for this
exercise.
In this exercise, you are to estimate factor sensitivities (betas) and expected returns for
two mutual funds or ETFs of your choice. You should use the four-factor model for your
analysis. When selecting, please use the following criteria:
1. The securities should have at least 5 years of prices.
2. The securities should invest primarily in U.S. equities.
3. Each security’s Morningstar Style Box should be available. You can find this
at www.morningstar.com. The style box is under “snap shot” for each
security.
Exercise requirements:
1. Using the data for monthly returns for the risk factors available on my BA 443
page (factor analysis post.xls), determine the factor sensitivities for each of your
security selections using a 5-yr, monthly four-factor regression model. You
should get monthly data from June 2003 to June 2008. You should turn in the
regression output for each security. This means running a regression for each
security where the independent variables (Xs) are the monthly returns on each of
the 4 factors and the dependent variable (Y) is the monthly return on the mutual
fund/ETF.
2. Based on the factor sensitivities, describe the composition of each security in
terms of the risk factors, i.e., is the security tilted toward large stocks, etc.
Basically, I want you to describe to me what each factor’s sensitivity tells you
about the security.
3. Comment on whether the security factor sensitivities are consistent with
Morningstar’s style boxes for each security. Provide me with a copy of the style
box.
4. Calculate an expected return risk premium for each security using 20-year risk
premium for each risk factor. Use the Historical Risk Premium table that I handed
out in class for these values. These historical values are also on the factor data and
regression worksheet on the excel spreadsheet (factor analysis post.xls).
