Problem -
In this exercise, you will need to use data in two excel files, "Factor returns.xlsx" and "Performance_Data.xlsx". In "Factor returns" we have the return data for the market portfolio (Mkt-RF), size portfolio (SMB), value portfolio (HML) and the momentum portfolio (Mom). It also has data on the risk-free rate. In "Performance Data", we have two sheets "Funds_in_1997" and "Funds_in_2016". In each sheet, the return data for 20 prominent mutual funds that were selected in December 1997 and December 2016. The returns data are from June 1997 to June 2017, but there are cases where data is missing due to funds that are closed and funds that are born after 1997. There are some funds that are selected in both 1997 and 2016.
1. What is the average Sharpe ratio/CAPM alpha/3 Factor alpha/4 Factor alpha for the funds selected in December 1997 and December 2016? Which is higher? Why do you think that was the case? If we did something similar for hedge funds, do you expect similar results?
2. What was the best-performing fund out of all funds in the data? From the factor regression results, what can you say about this fund compared to other funds?
3. What was the worst-performing fund out of all funds in the data? From the factor regression results, what can you say about this fund compared to other funds?
4. Use data from June 1997 to May 2003 to construct an optimal portfolio of mutual funds using the method that we covered in class. Use the 20 mutual funds selected in 1997 and assume that you cannot short these mutual funds and that you have a coefficient of risk aversion of 2. Using the same data from June 1997 to May 2003, select your favorite fund and explain why using that data. Use data from June 2003 to June 2017 to calculate the Shame ratio/CAPM alpha/3 Factor alpha/4 Factor alpha for this optimal portfolio and compare it to the performance of the fund that you selected above.
Show me the calculations.
Attachment:- Assignment File.rar