Advanced Finance
Advanced Finance Answer the following questions by performing the appropriate analysis. Please use this document inserting space where ···
Instructions:Advanced Finance
Answer the following questions by performing the appropriate analysis. Please use this document inserting space where necessary. When finished, upload your Word docx along with your do-file(s) showing the commands used to answer the questions.
- Using the dtadata file that contains the monthly returns for each stock in the Class Portfolio plus the Fama French and Carhart factors, examine the return performance of each stock using all available observations.
A.Calculate the following for each stock: (1) arithmetic mean return; (2) standard deviation of returns; (3) mean annualized compound return using 12 months in a year; (4) rank the mean annualized returns from best to worst (1=best); (5) the Sharpe ratio = (arithmetic mean return – mean risk free return) / standard deviation of return; and (6) rank the Sharpe ratio from best to worst (1=best) for the funds only and fill in the results in the following table. See the following link for an explanation of the Sharpe Ratio. Hint: use the collapse command to generate statistics by symbol. (round mean return, std. dev., and Sharpe ratio In decimal form to 4 decimal places; round annual mean return as a percentage to 2 decimal places)(https://www.investopedia.com/terms/s/sharperatio.asp.
B.What are the three tocks with the highest annual returns?Advanced Finance
C.What are the three stocks with the highest total risk?
D.What are the three stocks with the highest excess return per unit of risk?
2.Many investors believe there are calendar effects in the stock market. A calendar effect is any anomaly in the market, such as different performance or economic effects which appear to be related to the calendar. Two of these are the “January Effect” (https://www.investopedia.com/terms/j/januaryeffect.asp) and the adage “Sell in May and Go Away” (https://www.investopedia.com/terms/s/sell-in-may-and-go-away.asp). The data file dta, contains the monthly returns (ret) of the Class Portfolio, the factors from the Fama French and Carhart factor data, and a categorical variable (month) indicating the month of the return. Using all of the returns in the data set perform the necessary tests to examine whether or not the following effects can be found in the returns of the Class Portfolio.
A.The “January Effect” is a perceived seasonal increase in returns during the month of January. Create a test to see if anymonthly effects can be found in the Class Portfolio and answer the following questions.
1.What is the most appropriateStata estimator to examine whether or not there is any monthly effect in the Class Portfolio? Place an X in the Choice column below for the best estimator.
2.What is the null and alternative hypothesis?
3.Using the estimator from 2.A.1. perform the hypothesis test described in 2.A.2. and post the results on next page.
(Place test results on next page)
4.Do you reject or fail to reject the null hypothesis? What is the average return for January? Is the average return for January significantly different at the 95% confidence level from other months?
B.The adage “Sell in May and Go Away” is based on the perceived underperformance of some stocks in the “summery” six-month period commencing in May and ending in October, compared to the “wintery” six-month period from November to April. In order to determine if this effect can be found in the Class Portfolio, you must first create an indicator variable that takes the value of 1 (one) if the return is in the summer months and 0 (zero) otherwise. To create a variable named summer in the data to test this adage use the following command:
gen summer = (month > 4 & month < 11)
1.Using the variable named summer, what is the most appropriateStata estimator to examine whether or not there is a Summer effect in the Class Portfolio? Place an X in the Choice column below for the best estimator.
2.What is the null and alternative hypothesis? Advanced Finance
3.Using the estimator from 2.B.1. perform the hypothesis test described in 2.B.2. and post the results below.
4.Do you reject or fail to reject the null hypothesis? What is the average return in the summer and the winter months? Are the average returns significantly different at the 95% confidence level?
3.Using the StockReturns.dta data file that contains the monthly returns of each of the stocks in the Class Portfolio and the factors from the Fama French and Carhart factor data, answer the questions below.
A.Calculate the CAPM Beta and annualizedJensen’s alpha for each stock and complete the table below. Round the Alpha p-value to 3 decimal places and indicate with a yes/no in the “Significant?” column if the alpha is significant at the 95% confidence level.
B.Using the table above, answer the following questions:
- What is the benchmark in the CAPM model?
- What are the three stocks with the highest risk levels?
- What are the three stocks with the lowest risk levels?
- Which stocks outperform the benchmark on a risk-adjusted basis using a95% confidence level?
4.Using the dtadata file, perform a factor model analysis of the Class Portfolio’s performance using the CAPM, Fama & French 3-factor, and Carhart 4-factor models using the latest 60 months and complete the following questions.
A.Calculate the risk adjusted performance of the portfolio using the CAPM, Fama & French 3-Factor, and Carhart 4-Factor models. Report the coefficient estimates rounded to four decimal places and the p-values rounded to three decimal places.
B.Calculate the annualized (compounded) alpha as a percentage rounded to 2 decimal places (i.e. 12.25%) for each of the models and complete the following table.
C.Using the Carhart model, fill-in the standardized Beta coefficients rounded to 4 decimal places and rank the factors from 1 to 4 (1 = highest) in order of importance in explaining the risk-sensitivities.
D.Determine which factor(s) are significant in describing the portfolio’s performance and interpret their meaning. Include an analysis of Alpha.
E.Which model would you choose as the best model to evaluate performance? Why?
5.Describe in a few sentences, the topic you are considering, the data that you will need, and where you may find the data for your term project (data source).
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