FINC3017 Investments and Portfolio Management
Assignment 2: Analyzing Anomalies
Due: 11:59PM, 15 May 2023
Word limit: 1500, excluding tables, figures, and references.
Objective
The objective of Assignment 2 is to analyze the size, value, investment, and profitability
anomalies in the context of the portfolio theory and the CAPM. The assignment consists of two
parts. In the first part, you need to take the perspective of an investor who wants to trade on
these anomalies and investigate if incorporating the anomalies can push the investment
opportunity set/efficient frontier up and left. In the second part, you need to investigate if
these anomalies can be explained by the CAPM.
Data
Annual data on market portfolio, T-bills, and anomalies (VW quintile portfolios - annual),
downloaded from Ken French’s online data library, are contained in the spreadsheet
‘Assignment2_data’ in Canvas. The sample period is 1964 – 2022. You should only use the
data provided to you in completing this assignment.
Implementation
Part 1: Consider the following six investments:
1) Investing in the market portfolio
2) Investing in T-bills
3) Investing in small stocks (Lo 20)
4) Investing in value stocks (Hi 20)
5) Investing in high profitability stocks (Hi 20)
6) Investing in low investment stocks (Lo 20)
? Discuss the risk return characteristics of the above six investments, including plots of
annual returns and cumulative returns as well as a table that reports summary statistics
including mean, standard deviation, minimum, maximum, and Sharpe ratio.
? Plot the efficient frontier with the market and T-bills. This is the benchmark.
? Plot the efficient frontier with small stocks and T-bills, and check if the size anomaly can
be used to expand the benchmark investment opportunity set
? Plot the efficient frontier with value stocks and T-bills
? Plot the efficient frontier with high profitability stocks and T-bills
? Plot the efficient frontier with low investment stocks and T-bills
? You need to put different efficient frontiers/investment opportunity sets on the same
graph so the reader can compare them easily.
? Discuss the implications of your findings in the context of existing literature.
Additional Information
? Treat T-bills as a “risky” asset (e.g., use the actual standard deviation of the T-bills and
its correlations with other investments in your analysis).
Part 2: Using the quintile portfolios sorted on size, value, profitability and investment as
testing assets, evaluate the ability of the CAPM to explain the return differences in these
portfolios
? Plot the implied security market line from the 20 anomaly portfolios
? Use the Fama-MacBeth regression approach to evaluate the performance of the CAPM
Additional Information
? Estimate the betas using full sample information.
? For Fama-MacBeth regressions, report both coefficient estimates and t-stats
Submission
You need to prepare two files for submission in Canvas.
1. a written report that contains your results and discussions. Submit your report as a pdf
document via the ‘Assignment 2’ link in Canvas.
2. your workings. Submit your workings as an Excel spreadsheet via ‘Assignment 2 –
Supporting workings’ link in Canvas (include the code if using an alternative computing
program). Your workings will not be directly graded.
Marking
Marks will be awarded for correct quantitative analysis, the clarity of your discussion, and the
editorial aspects of your report (the report, tables, and figures should be professionally
formatted).
Reports will be checked by Turnitin and actions will be taken if academic dishonesty or
plagiarism is suspected.