For this activity: Identify 12 (or more if you want the project to...

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For this activity:
Identify 12 (or more if you want the project to be more realistic) publicly-traded firms with which you are familiar. Obtain the monthly prices for these firms and compute the following risk and performance measures for each of those firms.
Mean monthly arithmetic return
Mean monthly geometric return
Standard deviation of return
Beta relative to the market
Idiosyncratic volatility using CAPM
Sharpe ratio
Jensen’s alpha (same as CAPM alpha)
Betas relative to all the factors in the four-factor model
Four-factor alpha

Next, using your risk and performance measures, develop a trading strategy, i.e., use past data to rank firms such that higher-ranked firms are likely to perform well in the future while lower-ranked firms would perform poorly. Create a zero-cost portfolio in which you hold a Long position in firms in the top one third and a Short position in the firms in the bottom third. Compute all the risk and performance measures for this new portfolio.

The data for the project can be obtained from:
Yahoo! Finance
Ken French’s data website

To complete this Assignment:
Write a short report (in a Word document, not more than 5 pages, double-spaced) that contains the following:
Exhibit 1: Portfolio that includes all the risk and performance measures for all firms (i.e., a table in which the rows are the various firms and the columns are the various risk and performance measures. This exhibit will be embedded in your Word document and at the end of your report.
Exhibit 2: Annual Returns that include the risk and performance measures of your new portfolio (i.e., the trading strategy) and a plot showing the annual returns (i.e., a table showing the risk and performance measures and a plot chart showing the annual returns. This exhibit will be embedded in your Word document and a the end of your report.)
A brief description of all the calculations used
A brief discussion of any interesting observations from the results of your analysis

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Calculations used
The first step was to calculate the risk and performance measures for each of the firms. Data was sourced from Yahoo Finance and website of French. Since the market returns are not available, the returns on S&P 500 were used as proxy for market returns. The idiosyncratic volatility was computed using the residual returns as per CAPM. The formula used to find residual return was:
Residual return = Actual return – Return as per CAPM.
The variance of these residuals were obtained to find the idiosyncratic volatility. The residuals were averaged to find the value of alpha also....

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