Portfolio Management and Performance Evaluation
1. Using the 30-years of monthly data from 1986-2015 contained in the first tab of the spreadsheet for this assignment ("Homework Assignment #2 Data"), do the following:
(a) Calculate the average difference (denoted ‘SMB') in the average monthly return between small-cap stocks and large-cap stocks. Which had higher average returns - small (‘S') or big (‘B') cap stocks? What is the average of the ‘size premium' (the average return difference between small and big cap stocks, i.e., SMB)?
(b) Calculate the average difference (denoted ‘HML') in the average monthly return between value stocks (those with high book values relative to their market values) and growth stocks (those with low book values relative to their market values). Which had higher average returns - value (‘H') or growth stocks (‘L')? What is the size of ‘value premium' (the average return difference between value and growth stocks, i.e., HML)?
(c) Calculate the average difference (denoted ‘MOM') in the average monthly return between stocks with positive momentum (those whose prices have been rising recently) and those with negative momentum (those whose price has been falling recently). Which had higher average returns - those stocks with positive momentum or those with negative momentum? What is the size of ‘momentum premium' (the average return difference between the returns on stocks with positive momentum and those with negative momentum, i.e., MOM)?
(d) Which ‘premium' of the three in parts (a), (b), and (c) is largest? Which is smallest?
2. Use the most recent 30-years of annual data 1966-2015 contained in the second tab of the spreadsheet for this assignment ("Homework Assignment #2 Data") to do the following using nominal returns:
Determine the arithmetic and geometric average bond return premiums (i.e., average bond return compared to the average bill return).1 Are they roughly similar in magnitude?
(Note: The arithmetic return premium is determined by calculating the arithmetic average return separately for bills and bonds, and then subtracting the former average from the latter average. To determine the geometric return premium for bills do the following: (1) add 1.0 to each annual bill return in column B, (2) multiply the resulting 50 numbers together, (3) take the 50th root of the product, and (4) subtract 1.0 from this root. This gives you the geometric average return on bills; repeat this procedure except now use bond returns. The geometric
return premium involves subtracting the former average from the latter. NOTE: Steps (2) and (3) can be done simultaneously by using Excel's ‘GEOMEAN' function.).
Attachment:- Assignment_Data.xlsx