Should AQR launch its momentum funds?
After analyzing the case and assessing the condition of the market on the company, it can be determinedthat AQR should launch its momentumfund to target the low net worth investors in the market. As the momentum, strategy enables the fund manager to evaluate the future performance of certain stocks based on their past performance.
Fama- French Momentum (UMD/MOM)
After implementing the Fama-French Momentum on UMD and MOM, it can be determinedthat the average Expected return on UMD amounts to 10.83 and the average expected return on MOM amounts to 17.73. These are both significantly higher than 1. However, the Expected return of MOM was greater than the expected return generated under MOM. Furthermore, the expected utility on UMD amounts to 3.17% and the expected utility on MOM amounts to 2.92%. Therefore, the expected utility of UMD was higher than the expected utility of MOM. Moreover, the optimal weight of MOM accounts for 0.57% and the Weight of UMD account for 0.51%.
Compare the UMD factor to other specifications for momentum
The AQR index could have vitalimportance if the return is positive given in data calculated over a period of the decades from 1927 to 2008. Around 82 years, which means its eight decades. Similarly, the index has been using the most relevant data from these years by calculating the returns over given period to approach the that the stock is either the one decile or 10 deciles.
The stock with ranked one decile indicates the stock hasbeen ranked as the short-term stock. Which means losers stock that has been underperforming for many decades. On the other hand, the if the stock has the ten deciles or near to the tendeciles that mean the stock has been performing well in market, and would also perform well in the market in future.
Hence, Mutual Fund Company would take along position over that position. However, on given data, if we take a look at the market premium of the portfolio, then it could be understood that there are huge fluctuations in the market. The market premium id most important factor in calculating the return over the period.
Because the market premium is calculated by market return minus risk-free rate offered by the government securities. Meanwhile, there are huge fluctuations in the market premium. For example, the sometimes market premium is -18% or 21% or 28%, 32% or sometimes it even negative. Moreover, the median return of the HML, SMB and UMB is 10.18%.
However, the performance over the given decades differs with the medianbecause the number of the decades are 8 in the whole period of 82 years in given data. So, the average return for the decade is 21.7% over specified period. Similarly, the hedge fund has the most significant threat of the fluctuating the market premium that would have an adverse impact on the return in the future………………..
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