FINM7403 S1 2023 Assignment
1
FINM7403 Semester 1 2023
UQ Business School, University of Queensland
Assignment Overview
This is an individual assignment total of 30 marks counting towards 30% of your final grade.
Assignment due: 8th May 2023 15:00. Submit electronically on Blackboard and Turnitin.
Cash Flow Duration Strategy – Performance Evaluation (30 marks)
Goncalves (2021) proposes an active equity trading strategy – buy short-duration firms and sell long-
duration firms. You are required to evaluate the performances of ten portfolios formed on cash flow
duration as well as the long-short SML strategy (buy the shortest-duration and sell the longest-duration
firms) portfolio from July 1973 to June 2018.
You will need to download the data “data.zip” from the Assignment Folder.1 Complete the following
tasks using value-weighted portfolio returns from July 1973 to June 2018.
A. Report average excess returns over the Treasury bill rate, volatility, Sharpe ratios, alphas from
CAPM and Fama-French 3-factor models for all duration portfolios including the long-short
portfolios SML.2 (10 marks)
B. Is SML strategy (buy short duration firms and sell long duration firms) profitable? Your answer
should depend on several performance evaluation metrics learnt in the course. For factor risk-
adjusted returns, use CAPM and Fama-French factors. (5 marks)
C. Do you think the SML profitability comes from risk or from mispricing? Your
arguments/reasonings/discussions should demonstrate your understanding of academic and/or
industry research. (15 marks)
1 Please read the data descriptions carefully. The data folder contains duration portfolio returns, treasury rate
(RF) as well as risk factors (market, value, size).
Note that returns in dur port (nport=10).csv are expressed in raw units e.g.. 0.09 means 9%, while returns in
Fama French 3 factors.xlsx and size_value.xlsx are already in % e.g. 3 means 3%.
2 All statistics should be annualised. Also note that the SML strategy is not the Security Market Line !
FINM7403 S1 2023 Assignment
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Submission:
• Submit answers directly onto Blackboard for
a. Part A (report values up to 6 decimal places)
• Submit one written report which contains the discussions and answers for
a. Part B (approx. 500 words). Your answer should contain explanation of the calculations
and discuss/interpret the results.
b. Part C (approx. 2000 words). Your answer should contain literature review of the equity
duration risk premium regarding both theories and empirics. It should cover both rational
risk models versus behavioural models. Your answer should also contain your critical
evaluation of the literature. Hint: Goncalves (2021) provides a number of papers that are
relevant to your literature.
Only submit the written report once on Turnitin.
• Submit one Excel file, on the Blackboard site. Please name the files FINM7403_
_Lastname_Studentnumber.xlsx where X is the problem number, Lastname is your last name,
Studentnumber is your student number. You may submit the Excel file as many as you like, but
only your last submission will be graded.
• References should be in Harvard style. References should come from high quality sources e.g.
academic journals, industry reports, World Bank, IMF, etc.
References
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal
of Financial Economics, 33(1), 3-56.
Gonçalves, A. S. (2021). The short duration premium. Journal of Financial economics, 141(3), 919-
945.