Portfolio Optimization and Fama and French Three Factor
Given the three annual asset return series (S&P 500, AAA Bonds, and BO) in “Three Asset Returns” Tab and the “Example of Portfolio Optimization of 3 funds.xlsx” template:
- Run the regression of AAA Bonds as y and SP500 as x and report regression output in a separate sheet.
- Run the regression of BO as y and SP500 as x and report regression output in a separate sheet.
- The Equity risk premium is 5.2% and the Risk-free rate is 3.5%. Follow the “Solver” Tab in the “Example of Portfolio Optimization of 3 funds.xlsx” template, generate the optimal portfolio (mean, St. Dev, three portfolio weights, Sharpe Ratio)
Assume that no short selling allowed. The optimal portfolio consists of at least 2 assets. Find the optimal portfolio with mean return ranges from 0.050 to 0.090 at a 0.005 increment. Note that this is a portfolio optimization problem with 3 assets, S&P 500 is the market index and also 1 of the 3 assets that the optimal portfolio consists.
Part II: Fama and French Three Factor (40 Points)
Givent the multifactor data in “Fama and French Factors” and AAPL daily return data.
- Estimate a Fama-French three factor model and report the regression output in a seperate sheet.
- Interprate the regression output. Comment on the statistical significance of the three factors.
- How much is the Adjusted R Square and comment on the magnitude of Adjusted R Square.