FINA 6112 FC & FD
Updated Questions for “Smart Beta Exchange-Traded Funds and Factor Investing” (red
words are added):
1. What are Fama and French’s findings from their six-factor (or five-factor +
momentum) model? There are two schools of thought explaining these empirical findings.
What are the main differences between these two schools? How may these affect investors’
equity investment decisions?
2. Using the data in Exhibit 1, calculate the annualized average returns for the six groups
of quintile portfolios (beta, size, B/M, profitability, investment, momentum) for 2005 through
2014 and plot the results for each factor. Do the findings of Fama and French still hold true
for this period? Explain and discuss using the arguments of the efficient market school and
the arguments of the behavioral finance school. Is/are there other possible argument(s) or
reason(s) for the differences between these recent 10 years and older years?
3. What is meant by factor or smart beta investing? What is the rationale behind it?
Characterize smart beta ETFs.
4. This set of questions asks you to compare portfolios created from the MSCI factor
indexes and standard market capitalization-weighted iShares ETFs, along with the MSCI
USA Diversified Multiple-Factor Index and the MSCI US large-mid-cap index (the MSCI
USA Index).
a. Using the data in Exhibit 3, in one chart, plot the minimum-variance frontiers
constructed from:
• The four MSCI individual factor indexes
• The iShares large-mid-cap Russell 1000 ETF and iShares small-cap Russell 2000
ETF.
In the diagram, include the data points for the MSCI USA Diversified Multiple-Factor
Index (which is a proxy for iShares’ potential smart beta multifactor ETF) and the
MSCI USA Index.
b. What do you conclude about the value added from an investment perspective of the
combination of the individual factor indexes (which are proxies for iShares’ smart beta
individual factor ETFs) over traditional value-weighted investing? How does the
multifactor index compare to traditional investing? How does it compare to the
combination of the factor indexes?
5. This set of questions asks you to compare minimum-variance portfolios created from
iShares’ bond ETF (AGG) combined with various MSCI indexes.
a. Using the data in Exhibit 4, in one chart, plot the minimum-variance frontiers
constructed from the iShares bond ETF (AGG) with, respectively:
• The four MSCI individual factor indexes together
• The MSCI USA Diversified Multiple-Factor Index
• The MSCI USA Index
In the diagram, include the data points for the MSCI USA Diversified Multiple-Factor
Index and the MSCI USA Index.
b. Beyond Question 4, does your answer to 5a provide any additional insights into the
value added of the four MSCI factor indexes (which are proxies for iShares’ smart beta
individual factor ETFs) over traditional value-weighted investing? What about the MSCI
multifactor index (which is a proxy for iShares’ potential smart beta multifactor ETF)?
6. Should iShares introduce the new US multifactor large-mid-cap ETF? Why or why not?
What should be considered?