i. Retrieve the data and submit the Excel file with the data by e-mail. To check if
Question:
i. Retrieve the data and submit the Excel file with the data by e-mail. To check if you
are retrieving the right things, on January 23, 2017 (which is outside of the sample
period you need) S&P 500 closed at 2,265.20, and the 3-month Treasury bill yield
stood at 0.51% per year. (10 points)
ii. Estimate the market model for your portfolio. What are the alpha of your portfolio
and the appraisal ratio? Provide the economic interpretation of the two ratios. (10
points)
iii. Compare the performance of your portfolio with historical performance of Fidelity
Freedom 2030 fund using the alpha and the appraisal ratio (You can use the alpha
and the appraisal ratio of Fidelity Freedom we calculated in class). (10 points)
iv. Is your portfolio significantly riskier than Fidelity Freedom (assume that the beta
of Fidelity Freedom 2030 is constant, i.e. it is just a number)? Is it more actively
managed (look at R-squares)? (10 points)
v. Compute and interpret the M 2 measure and the Treynor ratio for your portfolio.
(10 points)
2
vi. Go to the website of Kenneth French and download the data on the daily returns to
SMB, HML, and the momentum factor (unfortunately the data is available only for
January, so for the next three questions limit your sample to April only). Add these
data to the Excel file you submit by e-mail. (5 points)
vii. Compute the correlation between returns to your portfolio and the returns to the
momentum factor. Does it look like you were ignoring or even shorting past losers
in January? (5 points)
viii. Redo (ii) using the data from January only. Given the result in (vii), does it look
like the alpha overestimates or underestimates your stock-picking ability? Give two
variants of the answer: using the historical evidence on the profitability of the mo-
mentum strategy and using the performance of this strategy in January. (15 points)
ix. Estimate the Carhart model for the daily return to your portfolio. What does it say
about whether you seem to be buying large or small stocks? Value or growth stocks?
Based on your actual holdings, do you agree with this assessment? (15 points)
x. What does the Carhart model conclude about your stock-picking ability? What is
the maximum expense ratio you can charge as a mutual fund manager? (A negative
number is acceptable as the expense ratio if you feel that you will need to be paying
your investors for letting you train using their money). (Hint: remember that the
expense ratio is being charged once a year). (10 points)
Expert Answer:
