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1.
When doing research on investing behavior, controlling for exposure to size, value, and momentum will reduce the effect of alpha.
True. Since alpha is considered the excess return attributable to a manager's skill, controlling for it will reduce the role of that skill. Over the past few decades, that has raised the bar for being a truly skilled manager.
2.
Once researchers identify an investment strategy that replicates alpha, what will happen to that alpha?
It will become beta. What was once considered alpha will become beta (or perhaps some other factor) once it is replicated by a known strategy.
3.
Style investing is a kind of factor investing that deals with _______.
Two factors -- size (large-small) and value (value-growth).
4.
Factor investing includes the study of _______.
All of the above. These factors and a few more are studied in factor investing.
5.
What is one consequence of factor-based investing?
The hurdle for being declared a truly skilled manager has risen over time. Today, studies looking for evidence of skill in equity mutual funds control for exposure to size, value, and momentum factors. In other words, if a manager's excess returns come during times that value, smaller-cap, or momentum stocks outperform, the procedure will adjust the "excess" return to zero.
