Question: RubricExplain CAPM, each component within the model along with the sole risk factor, how is the FF 3factor model constructed as an extension to CAPM,

RubricExplain CAPM, each component within the model along with the sole risk factor, how is the FF 3factor model constructed as an extension to CAPM, explaining each of these additional risk factors and their interpretation, how are each of these additional risk factors calculated, discuss return on each portfolio A and B, what does variance represent? And Calculate the Standard deviation. Discussing all risks associated with both portfolios, finally stating which portfolio to invest in, along with providing rationale

Question

1Using the CAPM as a benchmark, explain the Fama and French Three Factor Model, paying close interpretation to the calculation and interpretation of each risk factor. 10 Marks

2You have a choice to invest in either portfolio A or B. Based on the values provided below, what can you say about each portfolios risk adjusted performance? Which portfolio do you choose to invest in? Please provide rationale for your answer 15 Marks

	Portfolio A	Portfolio B
Return	8%	6%
Variance	2.4%	1.7%
Beta	1.2	0.7
SMB	0.8	0.5
HML	1.6	1.5
Risk free rate	1%

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