For this Project Assignment, you will examine the risk and return characteristics of
various publicly traded firms. You will obtain the monthly prices for these firms and
compute the risk and performance measures for each of these firms. You will also
compute the risk and performance measures of various portfolios.
For this activity:
Identify 12 (or more if you want the project to be more realistic) publicly traded firms
with which you are familiar. Obtain the monthly prices for these firms and compute
the following risk and performance measures for each of those firms.
1. Mean monthly arithmetic return
2. Mean monthly geometric return
3. Standard deviation of return
4. Beta relative to the market
5. Idiosyncratic volatility using CAPM
6. Sharpe ratio
7. Jensen’s alpha (same as CAPM alpha)
8. Betas relative to all the factors in the four-factor model
9. Four-factor alpha
Next, using your risk and performance measures, develop a trading strategy, i.e.,
use past data to rank firms such that higher-ranked firms are likely to perform well in
the future while lower-ranked firms would perform poorly. Create a zero-cost
portfolio in which you hold a Long position in firms in the top one third and a Short
position in the firms in the bottom third. Compute all the risk and performance
measures for this new portfolio.
The data for the project can be obtained from:
Yahoo! Finance: http://finance.yahoo.com or
Ken French’s data website available at
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
To complete this Assignment:
Write a short report (in a Word document, not more than 5 pages, doublespaced) that contains the following:
o Exhibit 1: Portfolio that includes all the risk and performance measures for
all firms (i.e., a table in which the rows are the various firms and the
columns are the various risk and performance measures. This exhibit will
be embedded in your Word document and at the end of your report.)
o Exhibit 2: Annual Returns that includes the risk and performance
measures of your new portfolio (i.e., the trading strategy) and a plot
showing the annual returns (i.e., a table showing the risk and performance
measures and a plot chart showing the annual returns. This exhibit will be
embedded in your Word document and at the end of your report.)
o A brief description of all the calculations used
o A brief discussion of any interesting observations from the results of your
analysis
