Constructing Fama–French Portfolios by Size, Book-to-Market, and HML Loading

Summary

The document explains how to recreate portfolio sorts associated with the Fama–French study of characteristics, covariances, and average returns. It first describes forming nine portfolios by independently sorting stocks on size and book-to-market ratio, then calculating value-weighted returns over the following July-to-June period. The stated inputs include book equity, market equity, and cross-sectional breakpoints, with sample exclusions also described.

Next, it outlines estimating each portfolio’s factor loadings from a regression of excess returns on the market, size, and value factors using a trailing period of monthly data. The estimated HML loading is then used to split each of the nine groups into low, middle, and high loading subsamples, producing 27 portfolios. The explanation interprets the HML slope as exposure to the value factor and notes that finer subdivision can leave portfolios poorly diversified. This is a procedural account of the paper’s construction, not a complete replication guide: it refers to tables and external data conventions that are not reproduced in full, and the document contains no replication results.

Key ideas

• Stocks are first grouped independently by size and book-to-market ratio to form nine portfolios.
• The described portfolio returns are value-weighted over July through the following June.
• A factor regression on prior monthly returns estimates each portfolio’s HML loading.
• Sorting each initial portfolio by its estimated HML loading creates three further groups.
• More granular sorts can produce portfolios with too few stocks for diversification.

Tags

# Calculating the total return on an Interest Rate Swap (with 1 year of duration)


# Calculating the total return on an Interest Rate Swap (with 1 year of duration)












Say I am the fixed rate payer on an interest rate swap and have 1 year of duration of exposure.

When I entered into the IRS (say yesterday), the quoted rate on Bloomberg was 15%.

Say tomorrow the quoted rate on Bloomberg falls to 14%. Is my return 1%? In other words do I take the difference between yesterday's rate and today's rate to calculate the return on 1 year of exposure?

Am trying to then compound these to then get a cumulative return chart. This would assume I balance each day to maintain 1 year of constant duration, correct?

Many thanks!

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.