Professional Documents
Culture Documents
Russell 1000 Growth: This index is a strong benchmark for the GLCGX fund
because the fund seeks growth companies with strong and predictable cash flows
and dividends, and the index is made up of larger companies with high price-tobook ratios, strong earnings, and high forecasted growth values. This includes
technology, consumer, discretionary spending, and consumer staples industry
verticals.
S&P 500: Because this index represents 500 largest companies by market
capitalization, it represents a fair benchmark for a fund built around leading
market firms, seasoned management, and strong financial fundamentals.
Russell 2000: This index is the most common for mutual funds that identify
themselves as small cap. The DVPEX fund does not consider dividends, but
instead focuses highly companies with a market capitalization value of under $2
billion.
Russell 2000 Value: DFA funds focus on value firms and small cap stocks. This
is a perfect benchmark for DTMVX as it invests in small companies with high
book-to-market ratios.
2. Based on the chosen benchmarks, how did each fund perform in the period from January 2000
through December 2004? Would you recommend buying any of the funds? If so, which?
Based on the chosen benchmarks, each fund performed as described below from January 2000
through December 2004. It seems as though TRBCX and DTMVX outperformed their
benchmark index, while GLCGX and DVPEX did not.
We would for sure recommend buying the DTMVX fund due to the strong relative performance
and the fact that the return over this period was positive. In addition, we would recommend
buying DVPEX due to the decent positive return over this period, despite the fact that it very
slightly underperformed with relation to the index.
4. Do the same as in (3), but now use (a) the Fama French 3 Factor Model, and (b) the Fama French
3 Factor Model plus the Momentum Factor. Based on your results, does it look like any of the
fund managers have stock picking skill?
5. Can you think of a way to use the industry portfolios to do something like problems (3) and (4)?
If so, how do your results compare?
PART B
1. Using whichever model(s) you deem appropriate, estimate the cost of capital for Yahoo (YHOO)
and Altria (MO) in December 2004. At that time, the yield on the 10 year and 30 year U.S.
government bonds was 4.2% and 4.9%, respectively. Both firms have opportunities to make new
investments that are broadly similar to their existing assets and are expected to produce an equity
return of 10% per year. The investments would be financed with the same historical mix of debt
and equity. In other words, focusing directly on the cost of equity is sufficient. No unlevering or
relevering is necessary.
2. How do the costs of capital that you estimate compare to those of the projects? Would you give
these projects the green light?
HINTS:
To run a regression in Excel, you will need to use the Data Analysis Add-in (you may need to go to
Excel Options->Add-ins and add it in. It should be under the Data Tab/Analysis in Excel) and choose
Regression. The Y variable in this example would be (Rit Rft) and the X variables would be the
Risk Premia. The alpha is a constant and the et are the residuals.
An Excel spreadsheet with all of the data from the tables in the case is in the CASE folder on
ONCOURSE.