EFIM20041 Quantitative Methods for Finance 1
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UNIT CODE: EFIM20041
UNIT NAME: Quantitative Methods for Finance 1
December 2022
Overview
• Your summative coursework represents 20% of the final mark for the unit.
• The coursework is in the form of a group work.
• Penalties will apply if the coursework is submitted late.
• You will be required to make a plagiarism statement and your submission will be tested for originality.
• You will need to deliver a report of approximately 1,000 words. At the end of the report, you must include an Appendix where you copy the code that you have written to obtain the results. Use within code comments (# plus text as learned in class) to make the code clearly understandable. The Appendix is excluded from the word count. Include all the tables (and graphs, if any) that you produced in the report (not in the Appendix). The Appendix should only contain the appropriately commented code.
Coursework requirement
Background
You are a team working for a fund of funds, a fund that specialize in investing in the best performing mutual funds. The job of your team is to look for funds that have a positive alpha. Today your boss has asked you to choose five mutual funds from the Yahoo Finance Mutual Fund Screener (https://finance.yahoo.com/screener/mutualfund/new) and investigate whether they have a positive alpha. The five mutual funds must have the following characteristics:
• Equity funds (Allocation 85%+ Equity);
• At least 5 years of monthly data.
Collect five years of monthly prices for each of the funds and compute the monthly returns for this sample period as
where t = 1, 2,…60 is the time index.
From Kenneth French’s website (https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html), collect monthly data for the Fama-French (FF) 3 factors and the risk free rate. Please note that those data are returns expressed in percentage (e.g., 2 means 2%). Therefore, in the rest of your analysis, you will need either (i) to multiply the mutual funds’ returns by 100 OR (ii) divide the FF factor returns by 100. Be careful to the scale when you interpret the results. You can use Excel to assemble the dataset and convert it into a csv to upload into R. The rest of the analysis must be performed in R.
Question 1 [20 marks]
Compute (and report) the summary statistics of the returns of the five funds that you have chosen (report whatever you think that will be helpful to achieve a better understanding of the data). Write a brief introductory paragraph in your report where you describe and discuss the summary statistics.
Question 2 [25 marks]
You are undecided on which of the two models below is appropriate to estimate the alpha:
and
(T − Rf)t = a + F1 (Rm − Rf)t + F2SMBt + F3HMLt + ut (T − Rf)t = a + F1 (Rm − Rf)t + et
(1)
(2)
where T − Rf is the return of the funds minus the risk-free rate; Rm − Rf , SMB and HML are the returns of the market factor, the small-minus-big factor and the high-minus-low factor from the FF library. For each of the funds under study, perform the appropriate test to decide between (1) and (2). In your report, explain what is the test that you performed and why it is appropriate. Then comment on the results (which you should report in a table).
Question 3 [35 marks]
For each of the funds under study, estimate the appropriate regression (either (1) or (2) according to what you have established in Question 2). Report the relevant output and comment on the results in the light of your research question, that is, whether these funds are able to generate significant and sizeable alpha after that we have considered for the appropriate risk factors. [Hint: the alpha is the intercept of the model].
Question 4 [20 marks]
Write a concluding paragraph for your report where you discuss potential limitations of your analysis and what remedies (if any) could be employed to improve the analysis. Note: you are not required to implement any fix, just discuss them.
Marks will be awarded for:
- Adopting the appropriate statistical tools to answer each of the question;
- Critically motivating any choice or assumption;
- Critically discussing the results;
- Identifying the limitations of your analysis;
- Clear and professionally formatted tables;
- Efficient and clear coding (try to avoid task repetition when possible and use loops instead; write clear comments on your code such that they are understandable to a third person; call the variables with appropriate and evocative names).
Your final essay must be submitted on Blackboard before the date and time stated above. If you have any queries when submitting your work please contact the Accounting and Finance Undergraduate Office (acfi- ug@bristol.ac.uk)
If you require a coursework extension, please complete the online form. You must provide supporting evidence for an extension request. Please see the University website for information onhow to submit an extension request.
You must submit assessed work before the deadline. Work that has been submitted late without extenuating circumstances is penalised by a reduction of ten marks (out of 100) for each 24-hour period after the agreed deadline, not including UK public holidays or University closure days. If the work is submitted late such that at least five such 24-hour periods have elapsed, the mark awarded will automatically default to zero. (Please see section 17 of theUniversity Regulations and Code of Practicefor further details)
If you experience circumstances that may impact your ability to submit the essay by the deadline, please submit extenuating circumstances via the online form. Please see the University website for information on how to submit extenuating circumstances.
Plagiarism and Cheating
The University rules and guidance aboutplagiarism and cheating, and how they are dealt with by the university inthe regulations.
Marking Criteria and Scales
The University rules and guidance aboutMarking Criteria and Scales via this link.
2022-12-15