Reference no: EM133693364

Portfolio Management Theory & Applications

PROJECT

You were a recent finance graduate, who has just begun your job with the investment firm AMP Capital. Paul Heath, one of the firm's directors, has been talking to you about the firm's investment portfolio. As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. The company currently holds positions in different portfolios of stocks listed on the New York Stock Exchange (NYSE), the American Stock Exchange (Amex), and the Nasdaq Stock Market (Nasdaq).

You are provided with daily data for all stocks in the portfolio assigned to your group from the Center for Research in Security Prices, LLC (CRSP). The dataset contains the following information:
Firm ID (firm)
Date (Date)
Company Name (COMNAM)
Exchange Code (exchcd)
Holding Period Return (ret)
Equal-Weighted Return (includes distributions) (ewretd). The data spans from 01 January 2000 to 29 December 2023.
In the CSRP database, the exchange code (exchcd) for each stock exchange is as follows:

Paul is unsure exactly whether the capital asset pricing model (CAPM) developed by Sharpe (1964), Lintner (1965), and Black (1972) is a suitable model to estimate the systematic risk beta, especially with the emergence of different types of unique crisis events like Covid. To explore this question, Paul has asked you to write a comprehensive report to address the following questions:

Use rolling betas in the cross-sectional approach you learned in INVE5000 to perform empirical tests of the CAPM for the portfolio assigned to your group in "Important Notes - Point 4" in the later part of this document.
Divide your dataset into three distinct periods:
The pre-COVID period spans from 01 January 2000 to 31 October 2019, inclusive.
The covid period spans from 01 November 2019 to 29 December 2023, inclusive.
The full period is defined as 01 January 2000 to 29 December 2023, inclusive.
For each period in Question 2 above:
Select one stock randomly from your assigned portfolio for analysis (denoted as Stock A).

Estimate the market model betas for Stock A across the specified periods and conduct tests for autocorrelation and heteroscedasticity.
For the selected stocks in Question 3a, report the stock's listing exchange and the statistical results from the tests in Question 3b. Explain the meaning of all these statistical test results.
For each period in Question 2 above, you are required to employ the rolling beta approach to perform cross-sectional tests of CAPM, as discussed in INVE5000, for your assigned portfolio over the defined periods.
You need to report the outputs of the cross-sectional regressions of returns on beta for each period defined in Question 2 for the portfolio in the report. Explain the meaning of these statistical test results for the assigned portfolio for each of the three defined periods. What are your conclusions about the validity of the CAPM in explaining the returns over the three defined periods? Are your conclusions supported by your empirical test results?

Presentation Guidelines:
You must submit the report in Word or PDF format clearly and logically and should include a cover page (indicating ALL group members' names and student numbers).
You are required to show your work (all estimation equations, regressions, if any) in all questions; present tables of your analysis in your report, and describe each step of the calculation. All tables must be included in the report. The submission set must include TWO components:
Completed report.
SAS code (.sas), which was used to perform all analyses required to produce the results presented in the report. Please note that the submitted SAS code and the assigned SAS data files must be replicated to produce the same results presented in your group's report.
The report must be typed. Please, keep a copy of your report as well.
A highly legible font type must be used before converting to PDF such as Arial, Helvetica, Palatino, and Times New Roman. Variants such as mathematical typesetting languages may also be used.
Ensure that your PDF text is readable both online and in print (it is recommended that 12pt font is used) this includes ensuring the readability of text within figures and tables (it is recommended that 10pt font is used). Tables must be numbered sequentially using Arabic numerals. Any illustrations used must be very clear and easy to understand.

Reference Guidelines:
Citation in text: Please ensure that every reference cited in the text is also present in the reference list (and vice versa). Unpublished results and personal communications are not recommended in the reference list.