1
Assignment # 1
BSAD-449
Portfolio Management
- The objective of the assignment is to introduce the students to the Fama and French 3 Factor Model.
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This is an INDIVIDUAL assignment.
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You are required to submit two reports: a Word document not exceeding 5 double spaced pages (12 point font size), and an Excel file that shows details of your work. The two files have to be submitted via Moodle by Sunday November 17, 2019 at 11:00pm. Only a print out of the word report must be handed in to the professor at the beginning of the lecture on Nov. 18, 2019.
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Use the Thomson Eikon Database to download the data.
1.
You would like to evaluate the historical relationship between value-oriented and growth oriented stocks that form the basis for the
HML
risk factor in the Fama-French multifactor model. The proxies you choose are the
Russell 1000 Value Index (.RLV)
and the
Russell 1000 Growth Index (.RLG), respectively.
a.
Download weekly price information for the five-year period from
January 01, 2014, to
December 31, 2018, for each index.
b.
For each index, calculate the set of weekly returns that correspond to these weekly price series.
c.
Calculate the average weekly return and the return standard deviation for each index series. Which equity investment style (i.e., value versus growth) appears to have been the most successful over this sample period?
d.
Suppose that you are considering forming a fund employing a strategy of always being long in value stocks and short in growth stocks. Evaluate the potential success of this strategy by taking the difference in returns between the value and growth indexes you analyzed above. What is the average return and return standard deviation for the return differential series?
e.
Plot the return differential series you calculated in Part d, using the return differential on the vertical axis and time on the horizontal axis. What do you conclude about the viability of the “long value, short growth” investment strategy? Can HML be a factor?
2.
It is proposed to use another alternative to check the relevance of the HML factor. Using an appropriate regression model to check whether the HML factor calculated above, explain the weekly returns of the following securities during the same period :
a. Tesla, Inc. (TSLA)
b. Alphabet Inc. (GOOG)
c. Walmart Inc. (WMT)
(hint: for each security, run the following univariate regression :
R
(i,t)
= a
0
+ b
i
HML
t
+ e
i
and check the significance of b
i)