The objective of the project is to construct a low-volatility portfolio, assess its risk and return structure, as well as its performance.

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FIN 359 SPRING 2016 FINAL PROJECT

Deadline: May 9, 2016, 5pm Pacific time

Project Submission: 1. The Group Leader is to submit the group’s Excel component (weight of 45%) onto Moodle.

2. The Group Leader is to submit the group’s PowerPoint component (weight of 55%) onto

Moodle.

3. All members of a group are to submit their peer evaluation onto Moodle.

(For (1) – (3), see Appendix, which is extracted from the course syllabus.)

4. Late submissions will be assigned a score of zero.

Project objective The objective of the project is to construct a low-volatility portfolio, assess its risk and return

structure, as well as its performance.

Data The data is contained in “FIN359 Spring 16 Final Project Data.xlsx”. In the data set are prices of

10 assets, which include a fund that mimics the benchmark S&P 500 Index (ASSET 1). The

time series are from June 30, 2006 to December 31, 2009.

Construction of a low-volatility portfolio The first exercise is the construction of an equally-weighted low-volatility portfolio, using

ASSET 2 to ASSET 10.

Assume an initial capital of $1,000,000, with the portfolio being long only (i.e., no short

positions can be taken).

The initial formation of the portfolio is set on June 30, 2007, by screening for low-volatility assets which are then used to construct an equally-weighted low-volatility portfolio. (Note: Low-

volatility assets are those with past one-year down-market betas of less than or equal to one. See

below for more details on the dual-beta model.)

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Six months later, on December 31, 2007, the portfolio is to be rebalanced, using the

aforementioned process. Continue with this six-month rebalancing procedure until the data has

been exhausted.

Assessment of the low-volatility portfolio As for the second part of this project, the equally-weighted low-volatility portfolio is then

analyzed over the period June 30, 2007 to December 31, 2009. The benchmarks against which

the portfolio is assessed against is ASSET 1 and an equally-weighted portfolio across the other

nine assets (that is, ASSET 2 to ASSET 10), which is rebalanced on the same dates as the low-

volatility portfolio.

First, assess the low-volatility portfolio and benchmarks’ risk and return structure.

Second, assess the performance of the low-volatility portfolio and benchmarks by employing the

Fama-French (1992) and Carhart (1997) four-factor model, with data provided by Professor

Kenneth French.1 The relevant data are “Fama/French 3 Factors [Daily]” and “Momentum

Factor (Mom) [Daily]”.

(Note: The Fama-French-Carhart four-factor model is an industry standard when it comes to

assessing investment performance and its methodology is made widely available on the Internet.)

1 http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

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THE DUAL-BETA MODEL The dual-beta model is an extension of the standard Capital Asset Pricing Model (CAPM). It

estimates separately the parameters for up-market, when the daily return for the market index is

non-negative, and down-market, when the daily return for the market index is negative. The

dual-beta model can thus be expressed as

��� − �� �� = �� �� + ß�

�(��� − �� )� � + �� �(1 − �) + ß�

�(��� − �� )� (1 − �) + ��,

where �� �, ��

�, �� �, and ��

� are the estimated parameters for up-market and down-market days

respectively; ��� = �� on days the market index did not decline and ��� = �� on days it did; D

is a dummy variable, which takes the value of 1 when the market index daily return is non-

negative, and zero otherwise. If there is no asymmetry in beta, then the dual-beta model is

identical to the standard CAPM model.

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Appendix

Group Project A group project would be required of groups and would be scored. The group project is due

latest by May 9, 2016, 5pm Pacific time and is to be uploaded onto Moodle. The group project consists of two components:

� Excel Component (Weighting of 45%)

This is a group assignment. A problem will be assigned and groups are to use Excel to

address the problem. The content of the Excel spreadsheet as well as layout are equally

important. The Excel spreadsheet must then be uploaded onto Moodle by the deadline.

� PowerPoint Component (Weighting of 55%)

This is a group assignment. The group project is to be presented on PowerPoint, as if one

were presenting in a business setting (e.g., a presentation to the CEO). The content of the

PowerPoint as well as presentation style are equally important. (Note that students need not

present in class but merely submit the PowerPoint with narration.) The PowerPoint must then

be uploaded onto Moodle by the deadline.

For every group, a group leader will be nominated, who will be responsible for the group (e.g.,

submitting group projects on behalf of the group, correspondence with the instructor, etc.).

Grading Policy Your course grade is based on your total score, as follows:

90 – 100 A

80 – 89.999… B

70 – 79.999… C

60 – 69.999… D

0 – 59.999… F

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Grades are not rounded, and +/- grading is generally not used in this class. Note that you must

have at least a 60 in order to pass.

� Project Score

Your project score is determined by the score I assign your group times the average

percentage of your peer evaluation.

� Peer Evaluation

Each student is to submit evaluations of their team members onto Moodle by the deadline (as

a Word document).

On a continuous scale from 0% to 100%, where 0% is for no contribution, 50% is for

moderate contribution, and 100% is for outstanding contribution to the project, your

evaluation will rate the overall contribution of your team members toward the group project.

Examples of guidelines for peer evaluation are:

o Does he/she make effort to the project? o Do his/her efforts create value to the project? o Is it easy to work with him/her?