Financing decisions and market efficiency - Multifactor models of risk
4 important questions on Financing decisions and market efficiency - Multifactor models of risk
What is a self-financing portfolio in the context of selecting portfolios, and why is the first portfolio important?
A self-financing portfolio is one where the investment is funded by its own assets. The first portfolio in the selection is important because it involves a long position in the market portfolio (buying stocks) and a short position in the risk-free asset (borrowing at the risk-free rate). This structure amplifies exposure to market risk, allowing investors to capture the market risk premium more effectively.
What is the book-to-market ratio strategy in self-financing portfolios? What is this portfolio called?
What is the past returns strategy in terms of self-financing portfolios? What is the portfolio called?
o This self-financing portfolio also is known as the prior one-year momentum
(PR1YR) portfolio.
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What is the Fama-French-Carhart (FFC) Factor Specification? How is this formula different from CAPM?
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