F1

Upload here your Word document and your Excel notebook which should have the following format.

Word document:

· The first page of your Word document should be like the mutual fund sheet and contain the basic information about your portfolio, the investment strategy and the tables and illustrations in the purple boxes.

· The second (and third) page of your Word document should contain a brief explanation for each stock why it is in the portfolio and what return you expect to it (alpha).

Excel notebook:

· The first sheet of the Excel notebook should be the prices you have downloaded.

· The second sheet of the Excel notebook should be data you download from the Fama-French data library.

· The third sheet of the Excel notebook should be the returns and excess returns of the stocks in your portfolio. (You will need the prices from the first sheet and the risk-free rate from the second sheet for this.)

· The fourth sheet should contain all CAPM regressions.

· The fifth sheet should contain all calculations for the construction of your portfolio.

· The sixth sheet should contain all 3-Factor model regressions.

· The seventh sheet should contain all calculations for the data summary of your portfolio. (This data goes onto the first page of your Word document.)

Q = N x K is correct

For your term project, you are going to build a portfolio of

5 stocks
and write a prospectus of your mini fund.

Consider the following three investors:

· Bryant is a 25-year-old young professional, employed in a major city in the northeast. Since joining the workforce three years ago, he contributes as much money as possible to his retirement accounts which is invested in a diverse set of index funds. An avid fan of Benjamin Graham’s “The Intelligent Investor”, he has decided to consider a few individual stocks of companies with good and stable long-term prospects as well as a great management.

· Nicole is 52 years old, and a few months ago, she retired from her well-paying job after aggressively saving and investing her money prudently for much of her life. While she could go back to work, if necessary, she prefers her financial independence. To maintain a steady cash-flow, her portfolio is heavily geared towards high yielding stocks, allowing her and her family to live of dividend payments for the most part. Aware of the downturn of General Electric and their dividend cut, she focuses on companies from which she expects a solid and steady dividend growth.

· Peter is in his mid-30s. He did not start a well-paying job until two years ago, and therefore, he is behind on his retirement savings. To make up for lost time, he is contributing the maximum allowed to his individual retirement account (IRA), which is invested in market ETFs.
Additionally, he sets aside $10,000 every year for risky high-growth investments.

Select one of these investors as your client for whom you create the portfolio of

5 stocks
. Your stocks must be listed on a US stock exchange and their IPO must be more than five years ago. Then, perform the following exercises:

1. Write
two paragraphs per stock in your portfolio explaining clearly why this stock is a good choice for your portfolio given the investor profile. Support your answers with both description of the firm and their business model and appropriate financial ratios.

2. Download five years of monthly stock prices from

April 2019 to April 2024
and compute the monthly returns from

May 2019 to April 2024
. (You need to download 61 prices to compute 60 returns).

3. Download the file In this file, you find excess market return, SMB, HML and the risk-free rate. Use the risk-free rate to compute the excess returns for your stocks.

4. Run a regression of the stocks’ excess returns against the excess market return to find the CAPM beta for each company’s shares.

5.
Make a forecast for the alpha of each stock, that is, the return that you expect the stock to perform minus the return predicted by the CAPM. Justify your alpha based on the firm’s business models and financial ratios.

6. Build an active portfolio with the

5 stocks
according to Chapter 27.1 in our textbook.

7. Run a regression of the stocks’ returns against the excess market return, SMB and HML to find the market beta, SMB beta and HML beta. Categorize each company into

a. defensive, neutral or aggressive for the market beta;

b. small, neutral or big for the SMB beta;

c. value, neutral or growth for the HML beta.

8. Run a regression on the portfolio with the weights you find in part 6 against the excess market return, SMB and HML to find the market beta, SMB beta and HML beta of the entire portfolio.

9. Based on your findings and the investment strategy, identify a benchmark portfolio against which you will compare your portfolio.

10. Recreate the sections in purple for your portfolio. A better copy of the mutual fund sheet can be found in Chapter 4.8 of our textbook.

Notes on Fama-French Factors:

· The Fama-French regressions give you a coefficient for the market risk of a stock or portfolio (), its exposure to the risk proxied by the size factor () and its exposure to the risk proxied by the value factor ().

· The interpretation of is the same as before:

· If an asset’s estimate for is 1, then it has the same market risk as the market portfolio.

· If an asset’s estimate for is less (greater) than 1, then it is a defensive (aggressive) investment with respect to market risk.

· The interpretation of is as follows:

· If an asset’s estimate for is greater than 0, i.e., positive, then it behaves more like a portfolio that is long small companies and short big companies.

· If an asset’s estimate for is less than 0, i.e., negative, then it behaves more like a portfolio that is short small companies and long big companies.

· If an asset’s estimate for is indistinguishable from 0 because it’s p-value is greater than 0.05, then the assets is balanced with respect to firm size as measured by market cap.

· The interpretation of is as follows:

· If an asset’s estimate for is greater than 0, i.e., positive, then it behaves more like a portfolio that is long value firms and short growth firms.

· If an asset’s estimate for is less than 0, i.e., negative, then it behaves more like a portfolio that is short value firms and long growth firms.

· If an asset’s estimate for is indistinguishable from 0 because it’s p-value is greater than 0.05, then the assets is balanced with respect to value vs. growth.

· Examples using 5 years of monthly data from 2018 to 2022:

· VTV ETF, capturing large value firms in the US market:

· The estimate for is 0.876, which is slightly below 1. We may classify this ETF as neutral to moderately defensive

· The estimate for is -0.133, which is negative with a p-value of 0.012, i.e., less than 0.05. We classify this ETF as behaving more like a portfolio short small firms and long big firms. We may also say the portfolio tilts slightly towards big firms since the coefficient is small in magnitude.

· The estimate for is 0.363, which is positive with a p-value of practically 0.000, i.e., less than 0.05. We classify this ETF as behaving more like a portfolio long value firms and short growth firms. We may also say the portfolio tilts towards value stocks since the coefficient is moderately big in magnitude.

· XLV ETF, capturing the Health Care sector in the S&P 500:

· The estimate for is 0.715, which is below 1. We may classify this ETF as moderately defensive

· The estimate for is -0.221, which is negative with a p-value of 0.100, i.e., not less than 0.05. We classify this ETF as behaving like a portfolio that is neither overweight in small or big firms – or as neutral in the size factor.

· The estimate for is -0.075, which is negative with a p-value of practically 0.079, i.e., not less than 0.05. We classify this ETF as behaving more like a portfolio that is neither overweigh in value firms nor growth firms – or as neutral in the value factor.