FINC3017 Investments and Portfolio Management
Investments and Portfolio Management
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Discipline of Finance
FINC3017 Investments and Portfolio Management
Assignment 2
Due date: Monday 23rd October 2023 before 11:59:59 pm
You are an analyst working for a large institutional fund manager. Following a meeting with with the quant
team, you have been asked to explore some potential new factors and some smart beta strategies to deter-
mine if there are risk premia available and whether certain strategies provide access to those premia.
You are to complete the following tasks:
Obtain monthly return data from January 2010 (201001) until December 2022 (202212) for the 49
industry portfolios (value weighted). These will be your investment assets.
Obtain the monthly return data for the Fama-French five-factor model factors (MKT, SMB, HML,
CMA, RMW).
Using monthy data over the same time range as above, obtain the return data for portfolios sorted by
Earnings/Price, Cashflow/Price, all value weighted, available from the Ken French Data Library.
Construct risk factors for each of the above characteristics by taking a long position in the top 20% of
sorted portfolios and a short position in he bottom 20%. Call these factors EP and CP respectively.
Using data from January 2010 until December 2020 inclusive, perform a Fama-MacBeth regression on
the two factor models outlined below to determine factor risk premia,
Ri,t = αi + βMKTRM,t + βSMBSMBt + βHMLHMLt + βCMACMAt + βRMWRMWt + ϵi,t
Ri,t = αi + βMKTRM,t + βSMBSMBt + βHMLHMLt + βEPEPt + βCPCPt + ϵi,t
Identify which, if any, of the proposed factors carry a risk premium at the 10% level of significance.
Suggest an investment strategy that can take advantage of one of your identified risk premia through
an overlay with the market portfolio. Be sure to explain carefully how you would implement this
investment. You may assume you have the capacity to take short positions and can invest directly in
your factors.
Examine the performance of your suggested investment strategy using the last 2 years of returns (Jan-
uary 2021 to December 2022) by computing annualised arithmetic and geometric means, volatilities,
Sharpe and Treynor ratios.
After completing your tasks above, you are to write a report of no more than 3 pages (including references,
tables and plots) that outlines your research. You must include an executive summary and review of the
literature pertaining to your studied factors. You should also present results in properly formatted tables
and provide a time series plot of the dollar value of your investment vs an investment in the market portfolio.
You may assume that you can rebalance back to target weights without cost.