Part 1. Univariate Statistics.
The data below was obtained from Professor Kenneth French’s data library website:
The table below contains monthly returns of the “Fama/French 5 Factors” and the monthly returns of the “Momentum factor” for the period from July 1963-December 2017 (654 months)
|Full Sample: 1963M07 – 2017M12|
|First sub-sample: 1963M07 – 1981M08|
|Second sub-sample: 1981M09 – 1999M10|
|Third sub-sample: 1999M11 – 2017M12|
Go to Yahoo! finance site. Please download monthly adj. close prices from 12/1/2012 to 12/1/2017 for S&P 500 index (^SP500TR) and the following funds:
|Sharpe Ratios (Monthly)|
The Sharpe Ratio measures excess return per unit of risk. The FSLCX fund has the highest Sharpe ratios and the FLATX fund has the lowest Sharpe ratios.
|Variable||Count||Mean||Std. Dev.||Std. Error of Mean||Lower Limit||Upper Limit|
Annualized risk free = 0.5%
|Mean||Std. Dev.||Sharpe Ratio (Annualized)|
Part 3. Estimating expected returns
In this section, you need to use information from Part 1 and Part 2.
Use the Fama-French 5-Factor model below to estimate the expected returns of each of the funds from part 2:
To simplify notation in the regression notice that = is stock or portfolio excess return and = is the excess return on a “stock market portfolio”
In order to do this follow 3 simple steps:
|Fama-French 5-Factor model|
|S.E. of regression|
Part 4. Forecasting models for the rate of inflation
Go to FRED’s website (https://fred.stlouisfed.org/) and download the data for:
In this hands-on exercise you will construct forecasting models for the rate of inflation, based on CPIAUCSL.
For this analysis, use the sample period 1970:M01–2012:M12 (where data before 1970 should be used, as necessary, as initial values for lags in regressions).
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