Implementing Multi Factor Index Allocation

Fama and French’s three factor model attempts to explain the variation of stock prices through a multifactor model that includes a size factor and BE/ME factor in addition to the beta risk factor. Fama-French model essentially extended the CAPM (which breaks up cause of variation of stock price into systematic risk which is non-diversifiable and idiosyncratic risk which is diversifiable) by introducing these two additional factors. Fama and French find that stocks with high beta didn’t have consistently higher returns than stocks with low beta and this indicates that beta was not a useful measure under their model. Their model is based on research findings that sensitivity of movements of the size and BE/ME factor constituted risk, and

In our analysis, we view the process of asset allocation as a four-step exercise like Bodie, Kane and Marcus (2005). It consists of choosing the asset classes under consideration, moving forward to establishing capital market

Identifying these factors helps to find out the strengths and capitalize them and eliminate the weaknesses and try

The extracted data used includes monthly returns from January 1972 to July 2011. The assets are selected so that the portfolio contains the largest, most liquid, and most tradable assets. The choice of such a variety of assets across several markets was used in order to generate a large cross sectional dispersion in average return. It helped to reveal new factor exposure and define a general framework of the correlated value and momentum effects in various asset classes.

SFCHC must also analyze other factors such as buyers and customers, resource availability for expansion, competitor activity, new technologies and substitutes, and potential competitors (White & Griffith, 2016, p.509). These factors will help the board understand the profile needs of the organization and identify areas of opportunities to ultimately help develop a sound strategic plan (White & Griffith, 2016).

I must acknowledge the Internet as a most valuable tool that helped me in the research and completion of this project. The reference page indicates the sources I tapped for the purposes of accessing information.

• For instance, Exhibit 2 shows Selection of firms based on industry. It assumes that these firms have the same growth, risk and return as the target firm. In reality, these fundamental variables differ from firm to firm even in the same industry. Reckless reliance upon this flawed assumption maybe detrimental if an industry has very few firms. The average obtained would contain a lot of errors.

Diversity investment among stock markets, bounds and nationally and internationally is the best me method of maintaining the risk of investment and expanding its growth. The fourth importance is the cost of single investment; the less money an investor pay; the more financial resources will have to take advantage on future investment opportunities that expand the return. Becker’s final advice of investment success was for investors to slick with their plan. “Lethargy bordering on sloth remains the cornerstone of our investment style”, Warren Buffett. Many investors get influenced by what goes around them and the media to end their investment prematurely or get involved in risky commitment outside of their goals.

The Dow Jones Industrial Average (DJIA) is indeed the most publicized and extensively known stock market on the globe. Being a major contributor of the N Y S E (New York Stock Exchange) trading stocks (Ullivan, & Steven, 2003), the index shares the United States’ economy by a notably significant margin. Also, the index has been operational for long since its inception in the nineteenth century, making it the first to be quoted by other publications. Its reputation has mushroomed all over because of its understandability and reliability in the market. This paper explains the DJIA index as well as its history in the simplest terms. Also, the paper critically evaluates the index taking into consideration that it is a price-weighted index, unlike other substantial value, weighted measures like the S & P 500 index.

Financial factor models are developed in an attempt to answer the question: ‘What really generates performance?’ Production Alpha models are rich and powerful, however, it is still a subset of information that has return and risk implication, many other investment signals should not be ignored. Therefore, the motivation of my project is to build, analyze, and monitor a factor library that satisfies the following criteria: First, it has a rich set of factors covering full spectrum of alphas and risks; second, it can be viewed as a robust and scalable platform that not only can build and maintain factors, but also can be used to analyze factors behaviors and fund exposures. The goal of the project is to trace insightful connection between the return of equity and the underlying factors to find out which factors generate returns for stocks. A factor can be thought of as any characteristics relating a portfolio of securities that is important in explaining their performance

To reduce a firm’s specific risk or residual risk a portfolio should have negative covariance or rather it should have no variance at all, for large portfolios however calculating variance requires greater and sophisticated computing power. As such, Index models greatly decrease the computations needed to calculate the optimum portfolio. The use of such Index models also eliminates illogical or rather absurd results. The Single Index model (SIM) and the Capital Asset Pricing Model (CAPM) are such models used to calculate the optimum portfolio.

Hence, Fama & French’s three factor model flourished when considering the market book value and the size of business. Additionally, in Fama and French’s (1996) paper, they concluded Sharpe – Lintner’s CAPM has never been an empirical success. According to the current study, the factors that affected the Beta are serious enough to invalidate most applications of the CAPM

Diversification is a method of investing that been shown to increase portfolio return while reducing portfolio risk as measured by standard deviation. This method specifically increases the efficient frontier for investors. The challenge to an investing firm is an appetite by its customers for an ever increasing efficient frontier. One area to explore to obtain this increase is through further diversifying through international diversification.

As a result, many different factors have been tested across different markets. Historically, most studies have relied on general economic theories or empirical observations in selecting Factors. Benaković and Posedel (2010) emphasize Interest rates, oil prices, and industrial production. Chen, Roll and Ross (1986) use industrial production growth, inflation, bonds spread, NYSE stock market returns, oil prices, interest term structure, and consumption to decompose returns of a portfolio with general securities. Bodurtha, Cho and Senbet (1989) even uses international factors. Most of literatures have focused on applying different factors with a portfolio of many securities, as it is widely known that idiosyncratic risks diversifies away as the number of

Second part is the individual investors have to set the investment guidelines and constraints while doing the investment. Investment guidelines are referred as the road map for investment over different stages of the financial life cycle, and also consist of the financial goals and the financial perspectives. After that, the individual investors have to address the investment constraints and take into consideration when managing the investment. Some constraint factors embraced tax consideration, investment duration and liquidity.