[SOLVED] FIN 6126 Assignment Python

Assignment

FIN 6126

Suppose you are a hedge fund manager. Your intern finds that sorting individual stock’s trailing 12-month returns (i.e., 12-month cumulative stock returns) and hold the portfolio for the next three months makes great money in US, which is the main result in the seminal paper by Jagadeesh and Titman (1993).

You are skeptical about the application in China. So, you would like to test the usefulness of (12,3)-momentum strategy in China.

You first download a sample of Chinese A-share stocks, excluding those with ST/ST* and firms in the financial industry. Then you define the momentum trading signal as

cum returni,t−11→t  = (1 + returni,t−11) × (1 + returni,t−10) × ⋯ × (1 + returni,t ) − 1

where returni,t  is stock’s monthly return, and cum returni,t−11→t is the 12-month cumulative return (which includes current month).

After you calculate the momentum trading signal, cum returni,t−11→t, in each month, you rank all firms accordingly. You calculate the average excess returns in the top 30% and bottom 30% extreme portfolios with three-month holding period.

where p represents the extreme portfolios, and return is the average portfolio returns. Lastly, you generate the time series of long-short portfolio returns.

returnLS,t+1  = return3,t+1→t+3  − return1,t+1→t+3

(Note that due to the limitation of Excel, we select a subsample of 20 stocks with balanced panel. Thus, the top 30% portfolio contains the top 6 stocks and the bottom 30% portfolio contains the bottom 6 stocks.)

Questions

1.   In the attached Excel spreadsheet, please generate a time series of returns in the LS portfolio.

2.   Calculate the annual average returns, standard deviation of returns, and the Sharpe ratio of the LS portfolio returns.

3.   Please calculate the annual CAPM alpha and the annual FF4 alpha (using MKTRF, SMB, HML, and MOM), as well as the CAPM beta.

4.   Assume that your initial wealth is $100 in all three portfolios (Top 30%, Bottom 30%,

and LS). Please draw the time series graph of the cumulative NAV in the sample period.

5.   What is your conclusion about the effectiveness of momentum strategy in China?