FIN 5550 ? Investments ? Winter I 2017

Project 2

The objectives of this exercise:

1. To perform multiple regression with real financial data.

2. To estimate the Fama ? French 3-factor model for a list of twenty stocks and interpret the regression output.

3. To discern whether individual stocks are small, mid or large cap and value, neutral or growth.

Learning Outcomes:

Students should be able to:

1. Perform Ordinary Least Squares regression to estimate the Fama ? French 3-factor model.

2. Perform proper inference with correct interpretation of t-statistics.

3. Discern whether a stock return significantly loads on one or more of the three factors.

4. Tabulate regression results and discuss empirical findings.

Guidelines:

1. You will be assigned twenty (20) stocks from the current S&P 500 index. You must use the same 20 stocks (or, more precisely, the ticker symbols) you used for Project 1. The last month of return data should be December 2016. You must use end-of-month data!

2. You must estimate the Fama and French 3-factor model. Thirty-six months of the three factors along with the risk-free-rate in decimal form will be provided in the accompanying Excel spreadsheet. Use these factors and the risk-free rate provided to you. The factors are MRP (BKM call this RM), SMB and HML. Note, you need excess returns for your stocks. Estimating the Fama and French 3-factor model requires the use of regression software. Answer the following question:

a. How, exactly, do Fama and French construct their SMB and HML factors?

3. For each firm, perform a multiple regression to estimate the parameters in equation (10.11) of BKM 9th ed. Then complete a Table:

Note that t(Alpha) above means the t-statistic for the alpha estimate and that t(Beta-MRP) means the t-statistic for the beta coefficient estimated for the MRP factor, etc.

4. Then, using the results from your multiple regressions, identify the ?style? for each of your 20 firms. In your write-up, be sure to explain how you identified the various styles. Styles include Large-Neutral, Large-Value, Large-Growth, Mid-Neutral, Mid -Value, Mid-Growth, Small-Neutral, Small-Value, Small-Growth:

Output:

You must submit a brief write-up of your results. Your paper should be detailed enough so that someone else could pick up your paper and replicate your results. So, you will need a brief introduction describing your data sources, how you manipulated the data, how you calculated the Fama-French betas, 2 Tables, and a brief summary and discussion of your findings. In total, you must submit:

1. Your write-up as a Word file.

2. An Excel spreadsheet (one sheet) containing the two Tables detailed above.

3. Another Excel spreadsheet detailing how, exactly, you calculated the results in your Table (i.e., replicate the detailed findings for your stocks). Note that the Excel spreadsheets in points 2 and 3 should be in one file with two different labeled worksheet tabs. Alternatively, you may use 20 Excel sheets named with the ticker symbol if you wish to combine the date, ticker symbol, adjusted closing prices, and calculations and/or regressions separately for each of your 20 companies.

Date 201401 201402 201403 201404 201405 201406 201407 201408 201409 201410 201411 201412 201501 201502 201503 201504 201505 201506 201507 201508 201509 201510 201511 201512 201601 201602 201603 201604 201605 201606 201607 201608 201609 201610 201611 201612 MRP -0.0332 0.0465 0.0043 -0.0019 0.0206 0.0261 -0.0204 0.0424 -0.0197 0.0252 0.0255 -0.0006 -0.0311 0.0613 -0.0112 0.0059 0.0136 -0.0153 0.0154 -0.0604 -0.0308 0.0775 0.0056 -0.0217 -0.0577 -0.0007 0.0696 0.0092 0.0178 -0.0005 0.0395 0.0050 0.0025 -0.0202 0.0486 0.0181 SMB 0.0087 0.0034 -0.0185 -0.0419 -0.0185 0.0301 -0.0422 0.0040 -0.0380 0.0428 -0.0205 0.0259 -0.0051 0.0051 0.0307 -0.0301 0.0090 0.0285 -0.0407 0.0052 -0.0261 -0.0193 0.0362 -0.0281 -0.0336 0.0083 0.0086 0.0068 -0.0027 0.0061 0.0290 0.0094 0.0200 -0.0441 0.0568 -0.0004 HML -0.0213 -0.0037 0.0503 0.0110 -0.0036 -0.0066 -0.0002 -0.0055 -0.0119 -0.0168 -0.0298 0.0212 -0.0347 -0.0173 -0.0045 0.0184 -0.0132 -0.0080 -0.0421 0.0271 0.0058 -0.0011 -0.0057 -0.0246 0.0226 -0.0048 0.0111 0.0325 -0.0179 -0.0149 -0.0098 0.0318 -0.0134 0.0415 0.0844 0.0352 RF Obs No. 0.0000 1 0.0000 2 0.0000 3 0.0000 4 0.0000 5 0.0000 6 0.0000 7 0.0000 8 0.0000 9 0.0000 10 0.0000 11 0.0000 12 0.0000 13 0.0000 14 0.0000 15 0.0000 16 0.0000 17 0.0000 18 0.0000 19 0.0000 20 0.0000 21 0.0000 22 0.0000 23 0.0001 24 0.0001 25 0.0002 26 0.0002 27 0.0001 28 0.0001 29 0.0002 30 0.0002 31 0.0002 32 0.0002 33 0.0002 34 0.0001 35 0.0003 36 List of Stocks in the S&P 500 Index on December 31, 2016: Ticker No. Ticker Symbol Company 1 AMG 2A 3 APD 4 AKAM 5 ALK 6 ALB 7 AA 8 ALXN 9 ALLE 10 AGN 11 ADS 12 LNT 13 ALL 14 MO 15 GOOGL 16 GOOG 17 AMZN 18 AEE 19 AAL 20 AEP Affiliated Managers Group, Inc. Agilent Technologies Inc Air Products & Chemicals Inc Akamai Technologies Inc Alaska Air Group Inc. Albemarle Corp. Alcoa Inc Alexion Pharmaceuticals Inc Allegion Allergan PLC Alliance Data Systems Alliant Energy Corp. Allstate Corp Altria Group Inc Alphabet Class A Alphabet Class B Amazon.com Inc Ameren Corp American Airlines Group American Electric Power FIN 5550 - Investments - Winter I 2017 Project 2 This project is worth 15% of your final grade. This project must be completed individually. The objectives of this exercise: 1. To perform multiple regression with real financial data. 2. To estimate the Fama - French 3-factor model for a list of twenty stocks and interpret the regression output. 3. To discern whether individual stocks are small, mid or large cap and value, neutral or growth. Learning Outcomes: Students should be able to: 1. Perform Ordinary Least Squares regression to estimate the Fama - French 3-factor model. 2. Perform proper inference with correct interpretation of t-statistics. 3. Discern whether a stock return significantly loads on one or more of the three factors. 4. Tabulate regression results and discuss empirical findings. Guidelines: 1. You will be assigned twenty (20) stocks from the current S&P 500 index. You must use the same 20 stocks (or, more precisely, the ticker symbols) you used for Project 1. The last month of return data should be December 2016. You must use end-of-month data! 2. You must estimate the Fama and French 3-factor model. Thirty-six months of the three factors along with the risk-free-rate in decimal form will be provided in the accompanying Excel spreadsheet. Use these factors and the risk-free rate provided to you. The factors are MRP (BKM call this RM), SMB and HML. Note, you need excess returns for your stocks. Estimating the Fama and French 3-factor model requires the use of regression software. Answer the following question: a. How, exactly, do Fama and French construct their SMB and HML factors? 3. For each firm, perform a multiple regression to estimate the parameters in equation (10.11) of BKM 9th ed. Then complete a Table: Note that t(Alpha) above means the t-statistic for the alpha estimate and that t(Beta-MRP) means the t- statistic for the beta coefficient estimated for the MRP factor, etc. 4. Then, using the results from your multiple regressions, identify the \"style\" for each of your 20 firms. In your write-up, be sure to explain how you identified the various styles. Styles include Large-Neutral, Large-Value, Large-Growth, Mid-Neutral, Mid -Value, Mid-Growth, Small-Neutral, Small-Value, SmallGrowth: Output: You must submit a brief write-up of your results. Your paper should be detailed enough so that someone else could pick up your paper and replicate your results. So, you will need a brief introduction describing your data sources, how you manipulated the data, how you calculated the Fama-French betas, 2 Tables, and a brief summary and discussion of your findings. In total, you must submit: 1. Your write-up as a Word file. 2. An Excel spreadsheet (one sheet) containing the two Tables detailed above. 3. Another Excel spreadsheet detailing how, exactly, you calculated the results in your Table (i.e., replicate the detailed findings for your stocks). Note that the Excel spreadsheets in points 2 and 3 should be in one file with two different labeled worksheet tabs. Alternatively, you may use 20 Excel sheets named with the ticker symbol if you wish to combine the date, ticker symbol, adjusted closing prices, and calculations and/or regressions separately for each of your 20 companies