Running Head: FAMA FRENCH FIVE FACTOR & AQR SIX FACTOR MODELS

FAMA FRENCH FIVE FACTOR & AQR SIX FACTOR MODELS

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FAMA FRENCH FIVE FACTOR & AQR SIX FACTOR MODELS

1.3: Analysis

1).

First, the table 1-4 has been replicated in the AQR’s blog post and the data for AQR’s
HML-Dev has been collected. All the other required data for Fama French Five factor, AQR Six
factors. 10 industry portfolios and 25 asset portfolios has been collected.

2). 25 Portfolios as Test Assets

2ai).

The five factor alphas have been computed for each of the 25 test assets and the t-
statistics has been computed. The overall t-statistic for the Fama French Model is 0.482, which
shows that the model is good in examining the returns of the test assets. The Computations are
shown below for all the 25 test assets.

SMALL SMALL
LoBM ME1 BM2 ME1 BM3 ME1 BM4 HiBM ME2 BM1
Mean Returns 0.85% 0.97% 1.27% 1.45% 1.64% 0.90%
Standard Deviation 12.26% 9.87% 9.01% 8.35% 9.31% 7.99%
Risk Free Rate 0.39% 0.39% 0.39% 0.39% 0.39% 0.39%
Sharpe Ratio 3.68% 5.85% 9.70% 12.69% 13.35% 6.34%
Beta 1.591 1.366 1.165 1.040 1.164 1.369
Five Factor
Alpha -0.352% -0.352% -0.351% -0.350% -0.197% -0.352%
T Statistic 0.76 0.35 0.33 0.10 0.06 0.97

ME ME ME ME ME ME ME ME ME ME ME
SMAL 1 1 1 SMAL 2 2 2 2 2 3 3 3
L BM BM BM L BM BM BM BM BM BM BM BM
LoBM 2 3 4 HiBM 1 2 3 4 5 1 2 3
Mean 0.97 1.27 1.45 0.90 1.20 1.26 1.35 1.53 0.98 1.18 1.21
Returns 0.85% % % % 1.64% % % % % % % % %
Standar 12.26 9.87 9.01 8.35 9.31% 7.99 7.50 7.26 7.43 8.71 7.42 6.47 6.52
d % % % % % % % % % % % %
Deviatio
n
Risk
Free 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39
Rate 0.39% % % % 0.39% % % % % % % % %
Sharpe 5.85 9.70 12.6 13.35 6.34 10.7 11.9 12.8 13.0 7.87 12.1 12.4
Ratio 3.68% % % 9% % % 9% 9% 3% 3% % 8% 7%
1.36 1.16 1.04 1.36 1.08 1.02 0.96 0.99 1.24 1.03 0.88
Beta 1.591 6 5 0 1.164 9 7 8 8 1 2 5 0
Five - - - - - - - - - - - -
Factor 0.352 0.35 0.35 0.35 0.197 0.35 0.35 0.35 0.40 0.35 0.35 0.35 0.25
Alpha % 2% 1% 0% % 2% 1% 1% 1% 0% 2% 2% 8%
T
Statistic 0.76 0.35 0.33 0.10 0.06 0.97 0.44 0.20 0.14 0.12 0.98 0.32 0.41

ME3 BM4 ME3 BM5 ME4 BM1 ME4 BM2 ME4 BM3 ME4 BM4
1.29% 1.43% 0.99% 1.02% 1.14% 1.25%
6.90% 8.52% 6.27% 6.08% 6.43% 6.81%
0.39% 0.39% 0.39% 0.39% 0.39% 0.39%
12.98% 12.12% 9.52% 10.35% 11.57% 12.49%
0.981 0.890 1.140 0.928 0.949 0.947
-0.351% -0.351% -0.352% -0.353% -0.352% -0.352%
0.18 0.08 0.76 0.78 0.50 0.20

ME4 BM5 BIG LoBM ME5 BM2 ME5 BM3 ME5 BM4 BIG HiBM
1.30% 0.89% 0.90% 0.98% 0.93% 1.23%
8.73% 5.35% 5.31% 5.65% 6.63% 8.57%
0.39% 0.39% 0.39% 0.39% 0.39% 0.39%
10.38% 9.31% 9.61% 10.35% 8.02% 9.70%
1.116 0.990 0.881 0.790 0.881 0.971
-0.351% -0.353% -0.404% -0.353% -0.147% -0.352%
0.31 0.92 0.97 0.97 0.96 0.54

Average Alpha 0.0032

T Statistic 0.482
GRS Test 1.000
2aii).

All the alphas are jointly equal to zero based on the GRS test since, the value of F
statistic is 1.000 as shown in the excel spreadsheet.

2bi).

The AQR Six factor alphas have been computed for each of the 25 test assets and the t-
statistics has been computed. The overall t-statistic for the AQRModel is 0.198, which shows
that the model is good in examining the returns of the test assets and it is much better model as
compared to the Fama French model. The Computations are shown below for all the 25 test
assets.

SMALL ME1 ME1 ME1 SMALL ME2 ME2

LoBM BM2 BM3 BM4 HiBM BM1 BM2
Mean Returns 0.85% 0.97% 1.27% 1.45% 1.64% 0.90% 1.20%
Standard
Deviation 12.26% 9.87% 9.01% 8.35% 9.31% 7.99% 7.50%
Risk Free Rate 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39%
Sharpe Ratio 3.68% 5.85% 9.70% 12.69% 13.35% 6.34% 10.79%
Beta 1.591 1.366 1.165 1.040 1.164 1.369 1.087
Five Factor
Alpha -1.537% -1.536% -1.535% -1.535% -1.533% -1.537% -1.536%
T Statistic 0.38 0.17 0.17 0.05 0.03 0.49 0.22

ME2 BM3 ME2 BM4 ME2 BM5 ME3 BM1 ME3 BM2 ME3 BM3 ME3 BM4
1.26% 1.35% 1.53% 0.98% 1.18% 1.21% 1.29%
7.26% 7.43% 8.71% 7.42% 6.47% 6.52% 6.90%
0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39%
11.99% 12.83% 13.03% 7.87% 12.18% 12.47% 12.98%
1.028 0.968 0.991 1.242 1.035 0.880 0.981
-1.536% -1.536% -1.535% -1.537% -1.536% -1.537% -1.536%
0.10 0.07 0.06 0.49 0.16 0.21 0.09
 ME3 BM5 ME4 BM1 ME4 BM2 ME4 BM3 ME4 BM4
1.43% 0.99% 1.02% 1.14% 1.25%
8.52% 6.27% 6.08% 6.43% 6.81%
0.39% 0.39% 0.39% 0.39% 0.39%
12.12% 9.52% 10.35% 11.57% 12.49%
0.890 1.140 0.928 0.949 0.947
-1.536% -1.537% -1.537% -1.537% -1.536%
0.04 0.38 0.39 0.25 0.10

ME4 BM5 BIG LoBM ME5 BM2 ME5 BM3 ME5 BM4 BIG HiBM
1.30% 0.89% 0.90% 0.98% 0.93% 1.23%
8.73% 5.35% 5.31% 5.65% 6.63% 8.57%
0.39% 0.39% 0.39% 0.39% 0.39% 0.39%
10.38% 9.31% 9.61% 10.35% 8.02% 9.70%
1.116 0.990 0.881 0.790 0.881 0.971
-1.535% -1.538% -1.538% -1.538% -1.538% -1.536%
0.15 0.46 0.49 0.49 0.48 0.27

Average Alpha 0.0154

T Statistic 0.198
GRS Test 1.000

2bii)

All the alphas are jointly equal to zero based on the GRS test since, the value of F
statistic is 1.000 as shown in the excel spreadsheet.

3). 10 Industry Portfolios

3ai).
 The five factor alphas have been computed for each of the 10 industry test assets and the
t-statistics has been computed. The overall t-statistic for the Fama French Model is 0.278, which
shows that the model is good in examining the returns of the test assets. However, the AQR
model is much better in predicting and examining the returns of the test assets The Computations
are shown below for all the 10 industry test assets.

FIVE FACTOR FAMA FRENCH MODEL (10 Assets)

NoDu
r Durbl Manuf Enrgy HiTec Telcm Shops Hlth Utils Other
Mean Returns 0.98% 1.08% 1.02% 1.02% 1.09% 0.86% 1.01% 1.09% 0.88% 0.90%
Standard
Deviation 4.61% 7.73% 6.27% 6.09% 7.28% 4.60% 5.84% 5.59% 5.55% 6.45%
Risk Free Rate 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39%
12.76 10.28 10.14 10.52 12.40
Sharpe Ratio % 8.93% 9.94% % 9.61% % % % 8.82% 7.86%
Beta 0.784 1.201 0.924 0.747 1.208 0.858 1.050 0.753 0.633 1.064
- - - - - - - -
Five Factor 0.096 0.119 0.202 0.234 0.005 0.196 0.004 0.195 0.073 0.072
Alpha % % % % % % % % % %
T Statistic 0.46 0.99 0.90 0.77 0.77 0.97 0.59 0.50 0.81 0.90
Average Alpha 0.0012
T Statistic 0.278
GRS Test 1.000

3aii).

All the alphas are jointly equal to zero based on the GRS test since, the value of F
statistic is 1.000 as shown in the excel spreadsheet.