Assessment Information – What you need to do
This assignment is an individual assignment.
You are the equity analyst for F&H Capital, a global investment firm located in New York. Your main task is to track the US and global equity markets and make recommendations to the trading departments. On this specific occasion, you are asked to provide an “Equity Research Report” on a portfolio of equities, exchange-traded funds (ETFs) and mutual funds.
There are two asset pricing models that the firm uses in assessing the predictability of the securities. These models are the Capital Asset Pricing Model (CAPM) and the Fama-French Three-Factor model.
The empirical CAPM is specified as follows:
𝑅𝑅𝑥𝑥𝑥𝑥 = 𝛼𝛼 + 𝛽𝛽1𝑅𝑅𝑚𝑚𝑚𝑚 (1)
𝛽𝛽1 is the market beta of portfolio X; 𝛼𝛼 is the intercept term.
𝑅𝑅𝑥𝑥𝑥𝑥 = (𝑅𝑅𝑐𝑐𝑐𝑐 − 𝑅𝑅f𝑡𝑡) defines the excess return on the portfolio X at time 𝑡𝑡
𝑅𝑅𝑚𝑚𝑚𝑚 = ( 𝑅𝑅𝑚𝑚𝑚𝑚𝑚𝑚 − 𝑅𝑅f𝑡𝑡) defines the market premium (return on the market portfolio – S&P 500 index) at time 𝑡𝑡.
𝑅𝑅𝑐𝑐𝑐𝑐, 𝑅𝑅𝑚𝑚𝑚𝑚𝑚𝑚 and 𝑅𝑅𝑓𝑓𝑓𝑓 are the return on portfolio 𝑐𝑐, market index 𝑚𝑚𝑚𝑚 and the risk rate, respectively.
The empirical Fama-French Three-Factor model is specified as follows:
𝑅𝑅𝑥𝑥𝑥𝑥 = 𝛼𝛼 + 𝛽𝛽1𝑅𝑅𝑚𝑚𝑚𝑚 + 𝛽𝛽2𝑆𝑆𝑆𝑆𝑆𝑆𝑡𝑡 + 𝛽𝛽3𝐻𝐻𝐻𝐻𝐻𝐻𝑡𝑡 (2) where:
𝑆𝑆𝑆𝑆𝑆𝑆𝑡𝑡 = Excess return of small cap over high cap firms at time 𝑡𝑡
𝐻𝐻𝐻𝐻𝐻𝐻𝑡𝑡 =Excess return of value stock over growth stock at time 𝑡𝑡
The details of your report are itemized below.
SECURITY SELECTION AND PORTFOLIO CONSTRUCTION
Three (3) equities listed on the NYSE or NASDAQ
Three (3) exchange-traded funds (ETF) listed on the NYSE or NASDAQ
Four (4) mutual funds domiciled in the US
Equities – 30%
Exchange-traded funds (ETF) – 30%
Mutual Funds – 40%
[Hint: This is equivalent to setting the weight of each security to 10%]
TIME SERIES VISUALISATION
9.Discuss the patterns you observe in the price and monthly series. The discussion should use relevant underpinning theories and economic events that explains the pattern observed.