Homework Assignment 3 FIN 5515-Investments You have each been assigned two stocks in the list below. You will be using the daily Fama- French factors and risk-free rates provided in the following file (through 1/31/2024): http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/F-F_Research_Data_Factors_daily_TXT.zip Note that you are only required to use the Fama-French 3-factor model in this assignment. If you wish to give the 5-factor model a try, go ahead. The data is on the same site. *** Important: The Fama-French factors provided in the web file are presented in percent (%). Your calculated returns, however, will probably NOT be in percent. You will need to divide the F-F factors by 100 or multiply your returns by 100. *** 1) Generate 36 months (3 years) of daily returns for each of your assigned stocks ending on January 31, 2024. If you find that your stock has fewer than 36 months of returns, contact me for a replacement stock. 2) Calculate the mean daily returns and annualized standard deviations of returns for the entire three-year period. 3) Calculate the daily returns in excess of the risk-free rate (Ri-Rf) using the risk-free rates from the Fama-French file (column 5). 4) Regress these values on the market's excess returns in the Fama-French file (column 2) and find each stock's market beta. Use the full three years of data when possible. 5) Using the daily Fama-French factors found in columns 2 through 4 of the F-F file, estimate the 3-factor model estimates for your stocks using only the first 33 months of data. Excel can be used to estimate multiple regressions very easily. 6) Using the factor estimates you have estimated, calculate the daily abnormal returns of your stocks for each trading day in November 2023, December 2023, and January 2024. 7) Report the cumulative abnormal returns for this entire three-month period. 8) I have attached very detailed instructions below if you need more guidance. Your individual stock assignments (2 per student) are listed in the table below... Anderson, Madelyne AAPL Apple Inc. TMUS T-Mobile US, Inc. Berotte, Marck ADBE Adobe, Inc. TSLA Telsa, Inc. Bettocchi, Luciano AMZN Amazon.com TXT Textron Inc. Burns, William AVGO Broadcom Inc. UNH UnitedHealth Group, Inc. Cardoso, Carolina AXON Axon Enterprise, Inc. V Chen, Ye AXP American Express Company WMT Visa, Inc. - Class A Walmart Inc. Creager, Keane BRK B Berkshire Hathaway Inc. Class B X United States Steel Corporation Helseth, Garrett CMCSA Comcast Corporation XOM Exxon Mobil Corporation Johnson, Tate COST Costco Wholesale Corp. INTC Intel Corporation Kaburov, Alexander ELF e.l.f. Beauty, Inc. HD The Home Depot, Inc. Kittrell, Caleb ET Energy Transfer LP NEE NextEra Energy, Inc. Loewen, Bianca F Ford Motor Company AAPL Apple Inc. Mattheys, Nicholas GOOGL Alphabet Inc. - Class A ADBE Adobe, Inc. McCarty, Aidan GS Goldman Sachs Group, Inc. AMZN Amazon.com Molta, Hanna JPM JPMorgan Chase & Co AVGO Broadcom Inc. Musleh, Mahamoud KO The Coca-Cola Company Axon Enterprise, Inc. Neiman, Scott LLY Eli Lilly and Company AXP American Express Company Recla, Ryan LMT Reichfield, Matthew LULU Lockheed Martin Corp. Lululemon Athletica, Inc. BRK B Berkshire Hathaway Inc. Class B CMCSA Comcast Corporation Saric Misic, Mila MNKD MannKind Corporation COST Costco Wholesale Corp. Sutherland, Bryce MSFT Microsoft Corporation ELF e.l.f. Beauty, Inc. Villalba, Nicolas NVDA NVIDIA Corporation ET Energy Transfer LP Wadler, Jacob PG Proctor & Gamble Company F Ford Motor Company Walters, Briana QCOM QUALCOMM Incorporated GOOGL Alphabet Inc. - Class A Zullo, Patrick SO Southern Company GS Goldman Sachs Group, Inc. Additional Detail for Those That May Require It Begin by calculating your stock's daily excess returns (the return in excess of the risk-free return). Rit=fit - fft where rit is the return on stock i at time t and A is the return of the risk-free asset at time t. The Fama- French data provides the daily risk-free returns as well as the market's excess returns. You can now calculate the stock's beta by regressing the excess returns on the market's excess returns (note that the Fama-French data is in "percent", so divide all four data columns by 100): Rit = ai +BiRMt+ Eit The next step is to run a time-series multiple regression of your excess stock returns on the excess market returns, SMB performance and HML performance (at this point, use only the first 33 months of data). This task requires running the following multiple regression: Rit = ai + BiM x RMt+ is SMB + BiH HMLt + it where Rit is the excess return on stock i at time t, ; is the estimated historic alpha, RMt is the excess return of the market portfolio at time t, SMB is the difference of returns on small and big stocks at time t, HMLt is the difference in return of high and low book-to-market ratio stocks at time t and it is the unexplained component of stock i's return at time t. Note that RMt, SMBt and HMLt (and rft are provided in the French website file). BiM, Bis, and BiH are the estimated factor betas for your stock. You now have estimates of the three factor betas you need to calculate your stock's daily expected returns using the Fama-French 3-factor Model (BiM, Bis, BiH). You can ignore the historical alpha (i). For any particular day in the last 3 months of data, the estimated excess return for that day will be E[Rit] = BiM RMt + is SMBt + BiH x HMLt Using this equation, a stock's expected excess return can be calculated each day using your beta estimates and the actual performance of the Fama-French factors on those days. Specifically, stock i's abnormal return on day t (ait) is the actual excess return minus the estimated (predicted) excess return: dit = Rit - E[Rit] = Rit - [BiM RMt + is SMB + BiH HML] The Fama-French 3-Factor model predicts what the return should be on the stock under normal conditions, E[Rit]. By taking the difference between actual returns and predicted returns for the stock at each point in time we find the daily abnormal returns (alphas). ARit = ait = Rit - E[Rit]