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    Workshop 5 Suggested Solutions

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    Dweep Kapadia
    The document provides guidance on forming portfolios and answering questions related to portfolio formation and analysis. It includes steps to sort stocks into terciles based on a characteristic, calculate the value-weighted return of each portfolio, and the hedged portfolio return.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Workshop 5 Suggested Solutions

    Uploaded by

    Dweep Kapadia
    17 views25 pages
    The document provides guidance on forming portfolios and answering questions related to portfolio formation and analysis. It includes steps to sort stocks into terciles based on a characteristic, calculate the value-weighted return of each portfolio, and the hedged portfolio return.

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    © © All Rights Reserved

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    The document provides guidance on forming portfolios and answering questions related to portfolio formation and analysis. It includes steps to sort stocks into terciles based on a characteristic, calculate the value-weighted return of each portfolio, and the hedged portfolio return.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    17 views25 pages

    Workshop 5 Suggested Solutions

    Uploaded by

    Dweep Kapadia
    The document provides guidance on forming portfolios and answering questions related to portfolio formation and analysis. It includes steps to sort stocks into terciles based on a characteristic, calculate the value-weighted return of each portfolio, and the hedged portfolio return.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 25

    Finance 361

    Workshop 5

    1
    Workshop 5
    “Workshop 5 Data”

    2
    Workshop 5 Forming Portfolios

    3
    Workshop 5 Forming Portfolios

    4
    Workshop 5 Question 1 & 2

    5
    Workshop 5 Excel

    6
    Workshop 5 Excel

    7
    Workshop 5 Excel

    8
    Workshop 5 Question 3

    9
    Workshop 5 Question 3

    10
    Workshop 5 Question 3 (a)

    11
    Workshop 5 Question 3 (b)

    12
    Workshop 5 Question 3 (c)

    13
    Workshop 5 Question 3 (d)

    14
    Workshop 5 Question 4

    ̶ The positive coefficient on HML suggests that the portfolio co-varies with
    high book-to-market stocks positively. But the coefficient is not statistically
    significant.

    15
    Workshop 5 Question 4

    16
    Workshop 5 Question 4

    17
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Assume the MRP is 5% and the risk free rate is 3%. Using the information provided in
    the tables below, construct the value-weighted tercile factor portfolio return for Q2
    2017 using lagged R&D spend percentage as the sorting variable. (Recall that
    “tercile” means that you sort into three portfolios).

    18
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Step 1: Understand the question
    Assume the MRP is 5% and the risk free rate is 3%. Using the information provided in
    the tables below, construct the value-weighted tercile factor portfolio return for Q2
    2017 using lagged R&D spend percentage as the sorting variable. (Recall that
    “tercile” means that you sort into three portfolios).

    19
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Step 2: Simplify your data

    Stock ID Returns Lagged R&D Mkt. Cap.


    107877 2.9% 15 8
    102738 3.8% 9 4
    120064 2.2% 12 5
    112922 -0.9% 11 3
    126659 2.3% 10 6
    108732 -3.5% 8 3

    20
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Step 3: Sort your data on characteristic ‘x’ – lagged R&D

    Stock ID Returns Lagged R&D Mkt. Cap.


    108732 -3.5% 8 3
    102738 3.8% 9 4
    126659 2.3% 10 6
    112922 -0.9% 11 3
    120064 2.2% 12 5
    107877 2.9% 15 8

    21
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Step 3: Create Terciles (Three equal sized portfolios)

    Stock ID Returns Lagged R&D Mkt. Cap.


    108732 -3.5% 8 3
    1 (low)
    102738 3.8% 9 4
    126659 2.3% 10 6
    2 (medium)
    112922 -0.9% 11 3
    120064 2.2% 12 5
    3 (high)
    107877 2.9% 15 8

    22
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Step 4: Calculate the value-weighted return of each portfolio

    Stock ID Returns Lagged R&D Mkt. Cap.


    108732 -3.5% 8 3
    1 (low)
    102738 3.8% 9 4
    126659 2.3% 10 6
    2 (medium)
    112922 -0.9% 11 3
    120064 2.2% 12 5
    3 (high)
    107877 2.9% 15 8

    Low: [(3/7)*-3.5%] + [(4/7)*3.8%] = 0.67%

    Medium: [(6/9)*2.3%] + [(3/9)*-0.9%] = 1.23%

    High: [(5/13)*2.2%] + [(8/13)*2.9%] = 2.63%

    23
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Step 4: Calculate the value-weighted return of each portfolio

    Portfolio Returns
    Low 0.67%
    Medium 1.23%
    High 2.63%

    24
    Workshop 5 Question 5 (2017 S1 Midterm Q4)
    Step 5: Calculate the hedged portfolio return

    Portfolio Returns
    Low 0.67%
    Medium 1.23%
    High 2.63%
    HML 1.96%

    HML = High Portfolio Return – Low Portfolio Return


    = 2.63% - 0.67%
    = 1.96%

    25

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