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HW 2 (Due on 3/24/2022 Friday)

Step 1. Download the equal-weighted 30 industry monthly returns and Fama/French 5 factors (2x3) from the Fama-French website.

Step 2. Keep the monthly observations from both datasets between 1963.07 and 2022.07 and prepare the outputs in csv format for the following MATLAB program..

Step 3. Run the MATLAB program HW2.m and complete the rest of problems.

Problems

1. What is the blue hyperbola? [2pts]

2.  Find the minimum variance portfolio (MVP). Report [1] the weights associated with the MVP, [2] the mean and the standard deviation of the MVP, and [3] Mark the MVP on the previous figure with a “red” dot. (Hint: either use equation 3.11 or equation 3.11, 3.12, 3.9, and 3.13 from week-5 lecture notes) [4] which part of the hyperbola is efficient? [5] What do the negative weights mean in the MVP? [18pts]

3. Capital Market Line (CML). [60pts]

[1] Add the CML in the previous figure, [2] report weights on the tangent portfolio, [3] report the mean and standard deviation of the tangent portfolio, [4-optional] verify whether the risky composition of the tangent portfolio on the CML is the same as the tangent portfolio on the efficient frontier.

4. Explain why the “market” portfolio is not the tangent portfolio as it was suggested by CAPM. [5pts]

Answer one of the following two problems: [15pts]

5A. Suppose that a group of investors will not invest in stocks in the “coal”, “Oil”, “Smoke”, and “Utility” industries. Let’s call them Greenpeace investors.

[1] Plot the portfolio frontiers and associated CMLs for both regular and Greenpeace investors in the same figure

[2] Compare the Sharpe Ratios between Greenpeace and regular investors. 9. Can you push the portfolio fronter for Greenpeace investors to the left by including some of the bond portfolios from assignment 1?

5B. Can you push the portfolio fronter for Greenpeace investors to the left by including some of the bond portfolios from assignment 1?