Test asset data: Use monthly value-weighted returns of 25 (5 * 5) size and book-to-market (BTM) portfolios from Ken French’s website for this assignment. (data for the case is in this website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html)
Part A:Pre-1992 summary statistics In-sample evaluation: Use data from July 1963 to December 1991 for questions 1 to 6.
Compute the average ANNUALIZED simple and continuously compounded returns for the factors and test portfolios. a. How are continuously compounded returns calculated? b. What are the advantages and disadvantage of using continuously compounded returns to analyse the expected return relation predicted by the CAPM? c. Report the summary statistics (mean, standard deviation, skewness, kurtosis, and Sharpe ratios) of the simple returns of factors and test portfolios. d. Comment on the relative performance of value and small stocks, and of small and large-cap stocks.
What is a “Fat tailed” distribution? Do the returns in the pre-1992 sample appear to have a “Fat-tailed” distribution? Briefly explain your answer.
Compute the annualized covariance matrix using monthly simple returns of the test portfolios.