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1 Price Momentum ( 5 0 points ) The file Project 1 . xls in the Projects folder contains monthly data on risk - free
Price Momentum points
The file Project xls in the Projects folder contains monthly data on riskfree rate RF
the excess return to the market MKTRF and the returns to the momentum strategy
MOM between January and June The momentum strategy buys the stocks
with the most positive returns in the past year and shorts the stocks with the most negative
returns in the past year. For this problem, assume that the riskfree rate RF is not constant.
i Compute the monthly average and the monthly standard deviation for MOM and
RF points
ii Based on these sample estimates, build the confidence interval for the return
to the MOM portfolio in the next year. Provide a concise explanation of what this
interval means in economic terms. points
iii. Assuming that the returns to the MOM strategy are uncorrelated across time, repeat
ii for the expected annual return to the index. Explain the difference. points
iv Assume that MOM and RF are uncorrelated. Compute the mean and standard
deviation of the daily return to strategy S which is MOM and RF Assume
trading days in a month. points
v Can you reject the hypothesis that the true expected monthly return to MOM is
zero? Use all three ways to test the hypothesis we discussed in class. points
vi Bonus question: Test the equality of the average returns to the MOM strategy and
the average excess return to the market, MKTRF points
vii. Compute VaR for strategy S if $ is invested for one quarter. Assume
trading days per quarter. points
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