Consider the returns-based style analysis results in the following table. Does t
ID: 2807545 • Letter: C
Question
Consider the returns-based style analysis results in the following table. Does this manager have skill? The manager claims to adhere to a strict style discipline. Do these results suggest that this is the case? If sc, what is the manager's style? 7. Large Sll Small Growth Value Growth RSquared 0.137 0.000 0.5830.864 Large InterceptBills Value G 0.1580.092 0.372 0.073 0.000 0.000 1.000 2 Allow leverage No leverage T-bills and SCG only 0.296 T-bills and LCV only 0.590 0.225 0.000 0.1690.093 0.0000.738 0.863 0.0000.000 0.927 0.859 0.000 0.000 0.000 0.799 (20 Marks)Explanation / Answer
The intercept in the return based style analysis regression is indicative of the Jensen measure which measures the outperformance against a benchmark.
Since the intercept is positive, it indicates outperformance and hence manager must be skilled.
The R-square value for the various styles as regressed against the benchmark portfolios are quite high ~ 80% and above which indicates a strict style discipline on the managers part.
The highest R-squared value is for the portfolio which allows for leverage which is indicated by shorting T-bills (negative co-efficient). Since the highest R – squared portfolio is the one having leverage, so that is the manager’s predominant style.