Download stock return data from CRSP and select monthly frequency. Each group should use different data period; I will inform you about it with the group formation. When selecting the Value-Weighted index, use the one that includes distributions. Also, add the variable that captures SIC Industry codes (called SIC Code in CRSP).
Also download Fama-French factor and momentum data from the following link
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
In this file you also get the market return and risk-free rate.
Task 1 [15 marks]
Use the standard SIC industry classification to create different equally weighted portfolios for each industry separately:
If a firm is missing a classification or it has some strange value move it to the non-classifiable industry. Delete any stock that is in the range: 0100-0999, 9100-9729 and 9900-9999.
1. Make a table that outlines the performance and characteristics of each of the remaining industry portfolios: Average return, Volatility, Beta (CAPM), Sharpe-ratio, average number of firms in each industry portfolio.
2. Create your own equally weighted index from the different industry portfolios. Give each industry an equal weight in each period.
3. Plot the cumulative returns of the industry portfolios over time as well as your own index in a graph.
4. Regress the industry portfolio returns against the Fama-French 3 factor model. What risk factors are you exposed to and to what degree? Do you generate a positive and significant alpha in any of the industry portfolios? (Max 200 words)
Task 2 [15 marks]
Imagine that you are a naïve investor in the year 2003. You decide to start saving some extra money for your retirement. You decide to save £300 per month: £100 in each of the three best performing industry portfolios from Task 1 over the preceding 12 months. You always look back 12 months at the end of each month to determine which industries to invest in.
Thus, at the beginning of each month you need to decide where to invest your new money. The money already invested stays in the industry where it was initially invested. This means that you will potentially hold several different industry portfolios at the same time.
If you do this over the sample period starting at the end of January 2003 with your first investment, until the end of the sample:
1. How is your money distributed over the different industries at the end of your data period?
• Plot the distribution at the end of your data period.
• Plot the development of the value of your different investments in the different industry portfolios over time.
2. What is your total capital gain in % over the total amount invested at the end of your data period?
3. What is your average annual return from this strategy?
4. What if you used a 6-month formation period for your new investments instead of 12 months, how would the results change? (Max 200 words)
Task 3 [15 marks]
Imagine that you do not want to use your own money to invest (unlike in Task 2). As a result, you decide to use a long-short portfolio strategy. If you each quarter go long the best performing industry portfolio and short the worst performing industry over the last 3 months with £300 each:
• How much money will you have amassed at the end of your data period?
• What is your average annual return of the long-short portfolio? (Max 100 words)
