Final Stocktrak Project

Due on March 15 by 8:30 pm

MGT 252 – Winter 2018

Investments and Portfolio Management

c 2018 Alexander Barinov

1 Strategy (60 points)

This part requires no calculation and no work with the data.

i. The Stocktrak project rules promise the 10% bonus to the top three teams at the

end of the trading period. If your goal is to maximize the probability that you will

be among the top three teams by the end of the trading period, should your strategy

deal primarily with high-beta stocks or low-beta stocks? Does the answer to this

question change depending on whether you expect the market to go up or go down?

(10 points)

ii. Suppose that you have to hold at least 10 stocks and at most 50 stocks in your

portfolio, and you are still trying to maximize the probability that you will be among

the top three teams by the end of the trading period. What is the optimum number

of stocks you need to hold in the portfolio? Would you prefer to have their returns

highly correlated or uncorrelated? (Hint: Think about the effect of diversification

on portfolio variance). (10 points)

iii. The Stocktrak project rules also promise the 3% bonus for the best performance

in each of the four three-week intermediate periods and the 12% bonus if you beat

the passive portfolio at the end of the trading period. You consider working with

either Google stock or call options on Google stock. When would you lean more

towards options: during the first three weeks or during the last three weeks? How

your answer will differ depending on whether you are currently beating the passive

portfolio? How your answer will differ depending on whether you expect the market

to go up or go down? (20 points)

iv. Suppose Toyota announces unexpectedly large bad earnings for the last quarter of

2017 and you decide to short the stock after the announcement. What does the EMH

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say about whether it is a smart move? What anomaly we studied in the course would

suggest otherwise? (10 points)

v. Describe your best and your worst move during the eleven weeks of trading. What

were the reasons of the gain/loss? (10 points)

2 Performance Evaluation (100 points)

To complete this part of the project, you will need the daily returns of your Stocktrak

portfolio. Also, you will need to download the level of S&P 500 index (and then make

them returns) – these data are available from Yahoo Finance, Google Finance, or elsewhere.

The proxy for the risk-free rate is the 3-month Treasury bill rate available from FRED at

St. Louis Fed (it is reported as annual return, you will need to make it daily assuming

250 days per year).

The grader will not have the opportunity to check if you did the regressions

right and will grade based on how you report them. If your results look weird,

but you feel they are right, explain to the grader why they look weird. If you

do not or if your explanation is unsatisfactory, points will be deducted.

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 M2 measure and the Treynor ratio for your portfolio.

(10 points)

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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 January 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 momentum 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)

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## Final Stocktrak Project

15
Mar