Reference no: EM133116385

Capital One considers introducing a new investment fund offered to its customers. The fund would be called the U.S. Value Fund, and its strategy assumes buying 10% of stocks in the U.S. market with the highest book-to-market ratio. Precisely, the strategy is rebalanced monthly and assumes buying every month a value-weighted portfolio comprising 10% companies from the U.S. market with the highest book-to-market (B/M) ratio. In other words, each month, the portfolio manager ranks all the firms on their B/M ratio and buys 10% of firms with the highest value of this indicator. The securities are held for one month, and the portfolio is re-constructed again. 

QUESTION B.1

Using historical data from the Kenneth R. French website, evaluate the performance of such a strategy in the past. Consider both the strategy's risk and profitability and explain the methods/ratios/indicators you calculated to evaluate the strategy performance. Please provide a relevant Excel spreadsheet along with this assignment. 

QUESTION B.2 

Do you think that the historical performance of the strategy would make it attractive to the customers? If so, what size of the management fee (expressed as a percentage of assets under management per year) could Capital One charge on its fund? Justify your answer. 

QUESTION B.3

How would you convince your customers that this strategy should work in the future? Explain the sources of its potential future profitability and abnormal returns.