FINC3017 Investments and Portfolio Management
Investments and Portfolio Management
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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).