Question: Factor [E(R M ) - R F ) SMB HML Sensitivity b i = 1.75 s i = -0.80 h i = 0.60 Risk premium

Factor

[E(R_M) - R_F)

SMB

HML

Sensitivity

b_i= 1.75

s_i= -0.80

h_i= 0.60

Risk premium

18.5%

5.25%

0.50%

Suppose the above asset is observed in the market trading with an expected return of 28%. What strategy would you suggest to profit from this situation, assuming the Fama-French model was the correct pricing model and the risk-free rate was 8%?

buy the asset

short-sell the asset

buy the risk-free asset

sell the market portfolio

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