You Are an Active British Stock Portfolio Manager

question 2

Essay

You are an active British stock portfolio manager. Your performance is measured against the FTSE index, a broadly based British stock index. It has been repeatedly observed that small-capitalization stocks outperform large-capitalization stocks over prolonged periods of time ("small-firm effect")
but that there have been periods when the reverse was correct. It has also been repeatedly observed that value stocks (firms with low price-to-book ratios) outperform growth stocks over prolonged periods of time ("value/growth effect") but that there have been periods when the reverse was correct.
How would an attribute factor model be useful in estimating the risks that your performance deviates from that of the assigned benchmark?

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Definitions:

Unearned Rent

Income received for rent before the rental period has occurred, classified as a liability until the period passes.

Adjusting Entry

An accounting record entry made at the conclusion of an accounting period to assign income and expenses to the period they genuinely happened.

Revenue Account

An account that tracks the income earned from normal business operations, including sales of goods or services.

Income Statement

A financial document that shows a company's revenues, expenses, and net profit or loss over a specific period of time.