Subject category:
Finance, Accounting and Control
Originally published in:
2018
Version: 15-May-2018
Length: 3 pages
Data source: Published sources
Abstract
This case is part of a case series. It can be used independently or together with the other case 'Estimation of the single-index model' as part of a general and practical discussion about the estimation of factor exposures of equity securities. Each case deals with a specific factor model and initiates discussions on different topics. In this case study, Tom Grady and Melissa Erstfeld discuss the estimation of the risk exposures of three US-based companies: Pepsico Inc, Manpower Group Inc and Era Group Inc. These companies belong to three different size (market capitalization) segments and exhibit different book-to-market ratios. The case analyzes two possible estimations, one with the single-index model and the other with the Fama-French three-factor model for the period from January 2016 to December 2017 at a weekly frequency. The case concludes that the estimation with the Fama-French three-factor model better captures the co-movements between the three stocks and dramatically decreases the correlations between the residual returns of each stock, suggesting that there may be more than one common source of security risk. The case then shows that the factor exposures of a portfolio consisting of the three stocks is simply a weighted average of the individual factor exposures. Finally the case breaks down the variance of the three-stock portfolio into systematic and firm-specific components. It suggests how this can be used in a risk management setting.
Locations:
Subject category:
Finance, Accounting and Control
Originally published in:
2018
Version: 28-Feb-2018
Length: 14 pages
Data source: Published sources
Subject category:
Finance, Accounting and Control
Originally published in:
2018
Version: 15-May-2018
Length: 15 pages
Data source: Published sources
Subject category:
Finance, Accounting and Control
Originally published in:
2018
Version: 28-Feb-2018
Length: 5 pages
Data source: Published sources
About
Abstract
This case is part of a case series. It can be used independently or together with the other case 'Estimation of the single-index model' as part of a general and practical discussion about the estimation of factor exposures of equity securities. Each case deals with a specific factor model and initiates discussions on different topics. In this case study, Tom Grady and Melissa Erstfeld discuss the estimation of the risk exposures of three US-based companies: Pepsico Inc, Manpower Group Inc and Era Group Inc. These companies belong to three different size (market capitalization) segments and exhibit different book-to-market ratios. The case analyzes two possible estimations, one with the single-index model and the other with the Fama-French three-factor model for the period from January 2016 to December 2017 at a weekly frequency. The case concludes that the estimation with the Fama-French three-factor model better captures the co-movements between the three stocks and dramatically decreases the correlations between the residual returns of each stock, suggesting that there may be more than one common source of security risk. The case then shows that the factor exposures of a portfolio consisting of the three stocks is simply a weighted average of the individual factor exposures. Finally the case breaks down the variance of the three-stock portfolio into systematic and firm-specific components. It suggests how this can be used in a risk management setting.
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Locations:
Related
Subject category:
Finance, Accounting and Control
Originally published in:
2018
Version: 28-Feb-2018
Length: 14 pages
Data source: Published sources
Subject category:
Finance, Accounting and Control
Originally published in:
2018
Version: 15-May-2018
Length: 15 pages
Data source: Published sources
Subject category:
Finance, Accounting and Control
Originally published in:
2018
Version: 28-Feb-2018
Length: 5 pages
Data source: Published sources