FIN41360: Familiarize yourself with the content of the data library on Professor Kenneth French’s webpage by reading the online legends and help: Portfolio and Risk Management Assignment, UCD, Ireland
| University | University College Dublin (UCD) |
| Subject | FIN41360: Portfolio and Risk Management |
- Familiarize yourself with the content of the data library on Professor Kenneth French’s webpage by reading the online legends and help.
- Then, select data from January 1963 to December 2021 on the 17 industry portfolios and carry out the following analysis:
i) Sketch the monthly MV efficient frontier of these portfolios using first the sample estimates of the required means and variance-covariance matrix and subsequently their Bayes-Stein counterparts, first by shrinking only the mean and then shrinking both the mean and the variance-covariance matrix.
ii) On the frontiers you constructed, highlight the points corresponding to the global minimum variance portfolio and to the tangency portfolio, assuming a risk-free rate equal to its average over the sample period. For these portfolios, also compute and report the mean excess-return, volatility, and Sharpe ratio.
iii) Compare and contrast the three frontiers you constructed. How would
do you explain their differences? - Next, choose one stock from each of the 17 industries and repeat the analysis above. Compare and contrast the two pairs of MV efficient frontiers you constructed, first when using sample estimates and then when using their Bayes-Stein counterparts. How would you explain their differences?
- Select data for the appropriate sample period on the risk-free rate and sketch the monthly MV efficient frontier for the 17 industry portfolios and the risk-free asset, using sample estimates of the required means and variance-covariance matrix. Compare and contrast this frontier to the ones previously constructed, after having explained the sample period for which you obtained data on the risk-free rate.
- Repeat the analysis required in the item just above using the Fama and French factor-mimicking portfolios, also available from the webpage of Prof Kenneth French, in place of the industry portfolios. Do so first using the so-called “Fama/French 3 Factors” and then the “Fama/French 5 Factors” mimicking portfolios. Compare the resulting efficient frontiers to the ones previously obtained. How would you explain their differences?
