FINC3017 Investments and Portfolio Management Assignment 2: Analyzing Anomalies Due: 11:59PM, 22 May 2022 Word limit: 1500, excluding tables, figures, and references. Objective The objective of Assignment 2 is to analyze the size, value, and momentum anomalies in the context of the portfolio theory and the CAPM. The assignment consists of two parts. In the first part, you need to take the perspective of an investor who wants to trade on these anomalies and investigate if incorporating the anomalies can push the investment opportunity set/efficient frontier up and left. In the second part, you need to investigate if these anomalies can be explained by the CAPM. Data Annual data on market portfolio, risk free rate, and anomalies (VW decile portfolios), downloaded from Ken French’s online data library, is contained in the spreadsheet ‘Assignment2_data’ in Canvas. The sample period is 1927 – 2021. You should only use the data provided to you in completing this assignment. Implementation Part 1: Consider the following five investments: 1) Investing in the market portfolio 2) Investing in the T-bills 3) Investing in small stocks (lo10) 4) Investing in value stocks (hi10) 5) Investing in high momentum stocks (hi10) Document the risk return characteristics of the above five investments, including plots of annual returns and cumulative returns as well as a table that reports summary statistics of the five investments including mean, standard deviation, skewness, and Sharpe ratio. Plot the efficient frontier with the market and T-bills. This is the benchmark. Plot the efficient frontier with small stocks and T-bills, and check if the size anomaly can be used to expand the benchmark investment opportunity set Plot the efficient frontier with value stocks and T-bills Plot the efficient frontier with high momentum stocks and T-bills You need to put different efficient frontiers on the same graph so the reader can compare them easily. Discuss the implications of your findings in the context of existing literature. Part 2: Using the decile portfolios sorted on size, value, and momentum as test assets, evaluate the ability of the CAPM to explain the return differences in these portfolios Plot the security market line for each of the three anomalies Use the Fama-MacBeth regression approach to evaluate the performance of the CAPM. When implementing the Fama-MacBeth regression, estimate the betas using full sample information. Submission You need to prepare two files for submission in Canvas. 1. a written report that contains your results and discussions. Submit your report as a pdf document via the ‘Report 2’ link in Canvas. 2. your workings. Submit your workings as an Excel spreadsheet via ‘Report 2 – Supporting workings’ link in Canvas (or code if using an alternative computing program). Your workings will not be directly graded. Marking Marks will be awarded for correct quantitative analysis, the clarity of your discussion, the structure of your report, and how well you present your findings (the report, tables, and figures should be professionally formatted).
