Linear Econometrics for Finance: Fall 2022
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Linear Econometrics for Finance: Fall 2022
PROJECT : Portfolio Choice
Project Report Due Date: December 23rd , 2022
The aim of this project is to recommend an investment strategy in a portfolio of stocks using regression analysis. The first step for this project is to select a set of stocks to form a portfolio. Your data source for the stocks is google/Yahoo! Finance and various factors as can be found below in the data sets. You can choose ANY set of stocks/bonds as part of the portfolio.
Your stock selection criterion has to be based on a specified quantitative strategy. For example, you have to evaluate the risk weights of the portfolio by Fama-French, CAPM, or Arbitrage Pricing Theory (APT). You will assume that the current date is Jan 1st 2021, and that the stockprice data and financial statements for your firm for the fiscal year 2020 have just been released. In other words, you do not have access to any quarterly results for Fiscal year 2021 at this point. (We want to avoid the Covid period for this analysis; hence sticking to the pre-covid data). You shall be evaluating the performance of your portfolio returns to actual stock price movements in 2021. You can rebalance your portfolio at most twice a month, but your rebalancing strategy has to follow a specific rule.
To form your portfolio you may use as much historical data on stock prices you want. Ideally you should have at least sixty data points (e.g., 5 years of historical information if you are using monthly data). You may start by running a regression to find the individual CAPM beta, APT and Fama French risk factor loadings for the portfolio and the stocks.
You must compare the performance of your portfolio for the year 2021 with that of a major index. Compare the performance of your portfolio during and before the Covid- 19 period (Mar 2020- Mar2022). Did your portfolio perform differently during the Covid period? Why?
Remember to check and test for the assumptions of the OLS in your regression. If any violations, please use the appropriate methods to correct for the violations.
WRITE-UP
Your write-up should be double-spaced, and should not exceed 5 pages. Include a brief executive summary in which you describe your major assumptions and your estimate of the firm’s stock price. Your report must be clear and succinct. In addition to the text, you may add up to 5 pages of exhibits like graphs, tables etc., You also have to submit all your data and all the codes written in Python.
APPENDIX A: DATA RESOURCES
A) Fama French Risk Factors:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
B) INFLATION
Monthly CPI data can be obtained from the St. Louis Federal Reserve’s web site http://research.stlouisfed.org/. This is a valuable tool in doing financial analysis. We’ll be using the Consumer Price Index (CPI) For All Urban Consumers – not seasonally adjusted.
C) BASIC FIRM SPECIFIC INFORMATION
All public information is here. Start with the current stock price and ticker.
You should go to your firm’s website to obtain the annual financial reports. Usually “investor relations” link will provide the annual reports. Read them and you will learn a lot about your firm.
D) BALANCE SHEET AND INCOME STATEMENTS
Past statements older than 3 years are not publicly available. You may use Yahoo Finance or Google finance or the SEC Edgar website to find the past financial statements of the firm.
E) INTEREST RATES AND ECONOMIC DATA
Current Treasury and corporate bond yields are available in http://bonds.yahoo.com. For historical corporate and treasury yields check the Board of Governor’s website http://www.federalreserve.gov/releases/h15/data.htm.
You can also find economic indicator data from World Bank or IMF websites.
F) JOURNALS AND OTHER DATABASES
Additional information on your firm is available from Wall Street Journal, the Standard.Com, CorporateInformation.com and several library resources.
2022-12-14