SMB Finance Assingment Help With Solution
For this project, you are not required to write extensively when asked to comment. A brief BUT VALUABLE paragraph will do nicely each time. Remember, you are educating the reader linking your results with textbook fundamentals. Always educate when you write.
This project is not designed to be a large burden. But as usual, please ensure your report is professional in appearance and presentation. Again, your report should not look like a homework assignment. You may rearrange the placement of any component of your assignment to properly educate your reader in the manner you desire.
1. Go to the online Data Library of Prof Kenneth French and download the following
a. Download Fama/French factors. Your data will show returns for the 3 FF factors: the market factor (Mkt-rf), the size factor (SMB), and the book-to-market factor (HML). You are also given the return series for the risk free rate.(Note: you will download this data in your computer lab session).
2. Download the Excel file containing monthly returns for two investment fund managers from Blackboard
Test 1 – Single Factor Model
1. Match the dates of your FF 3-factor data with the data that you have for your investment managers. Thus, delete all other FF monthly returns that are not relevant to your sample period.
2. Caution: Your monthly 3-factor return data are not formatted in decimals, but your fund returns are! You should convert your mutual fund data by multiplying each monthly return by 100.
3. Subtract the monthly risk free rate (provided in the FF data set) from each monthly return in the time series of each mutual fund. You have now formatted your manager returns as ‘excess monthly returns’.
4. Regress each manager’s excess monthly returns on to the returns of the single factor Market model(Mkt-rf). Mutual fund returns are thus the Y-axis, and Mkt-rf returns represent the X-axis. Observe the alphas and the betas for each investment manager (also the p-values)
5. How did each fund manager perform vs. the index model?
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Test 2 – Three Factor Model
6. Regress each manager’s excess monthly returns on to the returns of the three factor model (Mkt-rf, SMB, HML). Observe the alphas, and the betas (and p-values) for the Mkt-rf (market), the SMB (size) factor, and the HML (book-to-market) factor
7. Does your SMB beta indicate a small cap portfolio or large cap? Does your HML beta indicate a value portfolio or growth portfolio? Your lab results of 6 passive large/small and growth/blend/value portfolios should allow you to place your activefund results into perspective. In other words, use the passive FF portfolio results to act as say, a midpoint for the 2×3 boxes.
Final Equity Style Analysis
1. Next, independently research the topic of ‘Equity Style Boxes” from lecture or external internetsources.
2. Draw/Create a 3×3 Equity Style box using the horizontal labels: Growth, Blend, Value, and vertical labels: Large Cap, Mid Cap, Small Cap
3. Using your 3-factor model resultsfrom computer lab (i.e. the betas for SMB and HML), place the name of each manager in its appropriate style box (artistically). Your computer lab style boxes are only 2×3 rather than 3×3, thus you will need to use judgment in using the computer lab results to help place your fund managers in the appropriate box.
4. Compare your own Equity Style Box results to the boxes for each fund published at the investment website www.morningstar.com. (hint: Use the fund trading symbol at Morningstar and find the style box for each fund). While at Morningstar, look at the top portfolio holdings and top sector weightings of each of the two funds to help confirm your opinion. Are the portfolio holdings consistent with your expectations, i.e. growth or value stocks, small or large stocks:?
5. Final Comment: Is this quantitative methodology for determining a manager’s investment style better than simply reading the fund prospectus and making a personal judgment? Pros and cons?
1. Provide a professional presentation containing single-index and 3-factor model regression output for both funds as well as a graphical presentation of a 3×3 style box.
2. Your report should introduce the project, introduce each regression, comment on each regression output, introduce your equity style box, and finally comment on your results. (See above for specific comments required)
3. Length? I’m guessing about 2-4 pages including regression output and style chart.
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