What is the cross section of stock returns?
Cross section: How average returns change across different stock or portfolios.
Where do stock returns come from?
Stock returns come from the earnings that are distributed to investors as dividends, plus the earnings the company retains and invests in its own growth. This is called the Gordon Growth Formula. D is the dividend per share; D/P is called the dividend yield.
What is the Fama French 5 factor model?
The Fama/French 5 factors (2×3) are constructed using the 6 value-weight portfolios formed on size and book-to-market, the 6 value-weight portfolios formed on size and operating profitability, and the 6 value-weight portfolios formed on size and investment.
What is the meaning of cross-sectional analysis?
Cross-sectional analysis looks at data collected at a single point in time, rather than over a period of time. Essentially, cross-sectional analysis shows an investor which company is best given the metrics she cares about. Time series analysis, also known as trend analysis, focuses in on a single company over time.
How do we calculate return?
The formula is simple: It’s the current or present value minus the original value divided by the initial value, times 100. This expresses the rate of return as a percentage.
How does return on stock work?
When you put your money in a stock, you expect to get back more than you put in. This is called a positive return. If you get back less than you put in, you have a negative return. You can calculate the return for individual stocks and you can also figure the total return for your entire stock portfolio.
Which of the following variables are used to explain stock returns in the Fama French three factor model?
High Minus Low (HML), also referred to as the value premium, is one of three factors used in the Fama-French three-factor model. Small Minus Big (SMB) is one of three factors in the Fama/French stock pricing model, used to explain portfolio returns.
What does a positive RMW mean?
Robust minus Weak (RMW) accounts for the difference in returns between the firms with robust and weak profitability. Finally, it should be noted that a positive value in RMW factor means that firms with higher profitability earn better results, not too counter-intuitive.
What is cross market analysis?
Cross-sectional analysis looks at data collected at a single point in time, rather than over a period of time. The analysis begins with the establishment of research goals and the definition of the variables that an analyst wants to measure.
What is cross section in ” cross section of stock return “?
1 Answer 1. Cochrane (p. 435, 2005) gives a simple explanation between the difference of looking at expected returns in the time series and in the cross section: Time series: How average returns change over time. Cross section: How average returns change across different stock or portfolios.
How is leverage related to expected stock returns?
It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market β. Bhandari finds, however, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as β .
Is the expected return of a stock a linear function?
The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market β s (the slope in the regression of a security’s return on the market’s return), and (b) market β s suffice to describe the cross-section of expected returns.
What are two variables associated with stock returns?
Learn more. Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market β, size, leverage, book-to-market equity, and earnings-price ratios.