Question B (28 points) Table 1 and 2 present CAPM and FF 3 factor estimates for a fund ABC and a fund CBA with 82 observations. Table 3 presents the price of market, size, and value risk, and the riskfree rate. Note that r denotes the return, and z denotes the excess return. Table 1: CAPM Estimates ai Bi E(zit) Portfolio ABC 0.03 0.50 S.E. (0.01) (0.06) Portfolio CBA -0.02 0.95 NA S.E. (0.01) (0.07) NA\f9. (4 points) Write down CAPM's theoretical prediction and explain what each term represents. 10. (4 points) Which of the two funds faces more market risk? 11. (4 points) Compute the expected exoess return of fund ABC from Table 1. 12. (4 points) Compute the expect excess return of CBA after adjusting for market, size, and value risk; round to 2 decimal places (hint, the expect return of CBA is 0.08 from Table 2). 13. (4 points) Did ABC beat the market portfolio? If yes, use a one-sided test to see if it outper- formed significantly at 5% level (state the null and alternative hypothesis, the test-statistics, the critical value, and whether or not you reject the null; use the attached t-table for the critical value). If not, construct a new portfolio that has the same market risk exposure as ABC but yields higher expect return. Compute the expected return and variance of your constructed portfolio. 14. (4 points) Did ABC outperform the FF three factor prediction? If yes, use a one-sided test to see if it outperformed significantly at 5% level (state the null and alternative hypothesis, the test-statistics, the critical value, and whether or not you reject the null; use the attached t-table for the critical value).15. (4 points) Place fund ABC in the style box given the position of CBA. Value Blend Growth Large CBA Med Small