FINM7403-Capital Asset Pricing Model Report Writing - Accounting & Finance Assignment Help

Assignment Task

Task 

Part I: Testing the CAPM 
In this part you are required to test the Capital Asset Pricing Model on 25 U.S. portfolios formed on Size and Operating Profitability for the sample period from January 1963 to December 2020. You need to download returns data from Professor Kenneth French’s website.1 The data includes:
1) 25 portfolios formed on U.S. Size and Operating Profitability returns (use monthly valueweighted including dividend returns).
2) Fama/French 3 factors returns (monthly value-weighted returns). Complete the following task:
A. Perform the CAPM test. Does the CAPM work empirically for the sample period from January 1963 to December 2020? Present the evidence to support the conclusion. 

Part II: Is the CAPM really dead? 
The US Federal Reserve (FED) controls three tools of monetary policy - open market operations, the discount rate, and reserve requirements. While the Board of Governors of the FED is responsible for the discount rate and reserve requirements, the Federal Open Market Committee (FOMC) is responsible for the open market operations. The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions and determines the appropriate stance of monetary policy. Based on the assessments, they will make important interest rate announcements. FOMC announcements are perhaps the most-watched events in the financial markets across the globe.
Download from the Assignment folder the “FOMC_dates.csv” file which contains all of the FOMC scheduled meeting dates from 1997 to 2020.

Complete the following tasks:
A. Perform the CAPM test for FOMC periods as well as non-FOMC periods. Does the CAPM work? Present evidence to support the conclusion. You need to perform the CAPM test on the same 25 portfolios in Part I from 1997 to 2020. 

B. Why do you think that the CAPM works/does not work in two different subperiods? Your answer should demonstrate your understanding of relevant economic theories. Your arguments/reasonings/discussions should be supported by academic and/or industry research.

C. Repeat the analyses in Part II.A with 25 developed portfolios excluding U.S. portfolios formed on Size and Book-to-Market Value.
Is your conclusion similar or different from those of Part II.B? Discuss the economic implications of your results. Your answer should demonstrate your understanding of relevant economic theories. Your arguments/reasonings/discussions should be supported by academic and/or industry research.

Part III – Cash Flow Duration Strategy – Performance Evaluation
Goncalves (2021) proposes an active equity trading strategy – buy short-duration firms and sell longduration firms. You are required to evaluate the performances of ten portfolios formed on cash flow duration as well as the long-short SML (buy short duration and sell long duration firms) portfolio from July 1973 to June 2018. You will need to download the data “duration_port.zip” from the Assignment Folder 3 Complete the following tasks using value-weighted portfolio returns from July 1973 to June 2018.

A. Is SML profitable? Your answer should depend on several performance evaluation metrics learnt in the course. For factor risk-adjusted returns, use CAPM and Fama-French factors. The risk free rate and factors information can be downloaded in Part I above. 

B. Do you think the SML profitability comes from risk or from mispricing? Your arguments/reasonings/discussions should demonstrate your understanding of academic and/or industry research.

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