Term Project AD 717
Final Project
For your term project, you are going to build a portfolio of 5 stocks and write a prospectus of your mini-
fund.
Consider the following three investors:
 Bryant is a 25-year old young professional, employed in a major city in the northeast. Since
joining the workforce three years ago, he contributes as much money as possible to his
retirement accounts which is invested in a diverse set of index funds. An avid fan of Benjamin
Graham's "The Intelligent Investor", he has decided to consider a few individual stocks of
companies with good and stable long-term prospects as well as a great management.
 Nicole is 52 years old, and a few months ago, she retired from her well-paying job after
aggressively saving and investing her money prudently for much of her life. While she could go
back to work if necessary, she prefers her financial independence. In order to maintain a steady
cash-flow, her portfolio is heavily geared towards high yielding stocks, allowing her and her
family to live of dividend payments for the most part. Aware of the downturn of General Electric
and their dividend cut, she focuses on companies from which she expects a solid and steady
dividend growth.
 Peter is in his mid 30s. He did not start a well-paying job until two years ago, and therefore, he is
behind on his retirement savings. To make up for lost time, he is contributing the maximum
allowed to his individual retirement account (IRA), which is invested in market ETFs.
Additionally, he sets aside $10,000 every year for risky high-growth investments.
Select one of these investors as your client for whom you create the portfolio of 5 stocks. Your stocks
must be listed on a US stock exchange and their IPO must be more than five years ago. Then, perform
the following exercises:
1. Write two paragraphs per stock in your portfolio explaining clearly why this stock is a good choice
for your portfolio given the investor profile. Support your answers with both description of the firm
and their business model and appropriate financial ratios.
2. Download five years of monthly stock prices from December 2017 to December 2022 and compute
the monthly returns from January 2018 to December 2022. (You need to download 61 prices to
compute 60 returns).
3. Download the file https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/F-
F_Research_Data_Factors_CSV.zip. In this file, you find excess market return, SMB, HML and the
risk-free rate. Use the risk-free rate to compute the excess returns for your stocks.
4. Run a regression of the stocks’ excess returns against the excess market return to find the CAPM
beta for each company’s shares.
5. Make a forecast for the alpha of each stock,
that is, the return that you expect the stock
to perform minus the return predicted by
the CAPM. Justify your alpha based on the
firm’s business models and financial ratios.
6. Build an active portfolio with the 12 stocks
according to Chapter 27.1 in our textbook.
7. Run a regression of the stocks’ returns
against the excess market return, SMB and
HML to find the market beta, SMB beta and
HML beta. Categorize each company into
a. defensive, neutral or aggressive for
the market beta;
b. small, neutral or big for the SMB beta;
c. value, neutral or growth for the HML
beta.
8. Run a regression on the portfolio with the
weights you find in part 6 against the excess
market return, SMB and HML to find the
market beta, SMB beta and HML beta of the
entire portfolio.
9. Based on your findings and the investment
strategy, identify a benchmark portfolio against which you will compare your portfolio.
10. Recreate the sections in purple for your portfolio. A better copy of the mutual fund sheet can be
found in Chapter 4.8 of our textbook.
Notes on Fama-French Factors:
 The Fama-French regressions give you a coefficient for the market risk of a stock or portfolio (ெ௄்),
its exposure to the risk proxied by the size factor (ௌெ஻) and its exposure to the risk proxied by the
value factor (ுெ௅).
 The interpretation of ெ௄் is the same as before:
o If an asset’s estimate for ெ௄் is 1, then it has the same market risk as the market portfolio.
o If an asset’s estimate for ெ௄் is less (greater) than 1, then it is a defensive (aggressive)
investment with respect to market risk.
 The interpretation of ௌெ஻ is as follows:
o If an asset’s estimate for ௌெ஻ is greater than 0, i.e., positive, then it behaves more like a
portfolio that is long small companies and short big companies.
o If an asset’s estimate for ௌெ஻ is less than 0, i.e., negative, then it behaves more like a
portfolio that is short small companies and long big companies.
o If an asset’s estimate for ௌெ஻ is indistinguishable from 0 because it’s p-value is greater than
0.05, then the assets is balanced with respect to firm size as measured by market cap.
 The interpretation of ுெ௅ is as follows:
o If an asset’s estimate for ுெ௅ is greater than 0, i.e., positive, then it behaves more like a
portfolio that is long value firms and short growth firms.
o If an asset’s estimate for ுெ௅ is less than 0, i.e., negative, then it behaves more like a
portfolio that is short value firms and long growth firms.
o If an asset’s estimate for ுெ௅ is indistinguishable from 0 because it’s p-value is greater than
0.05, then the assets is balanced with respect to value vs. growth.
 Examples using 5 years of monthly data from 2018 to 2022:
o VTV ETF, capturing large value firms in the US market:
Coefficient Std. Error p-value
MKT 0.876 0.025 0.000
SMB -0.133 0.051 0.012
HML 0.363 0.031 0.000
 The estimate for ெ௄் is 0.876, which is slightly below 1. We may classify this ETF as
neutral to moderately defensive
 The estimate for ௌெ஻ is -0.133, which is negative with a p-value of 0.012, i.e., less than
0.05. We classify this ETF as behaving more like a portfolio short small firms and long big
firms. We may also say the portfolio tilts slightly towards big firms since the coefficient
is small in magnitude.
 The estimate for ுெ௅ is 0.363, which is positive with a p-value of practically 0.000, i.e.,
less than 0.05. We classify this ETF as behaving more like a portfolio long value firms and
short growth firms. We may also say the portfolio tilts towards value stocks since the
coefficient is moderately big in magnitude.
o XLV ETF, capturing the Health Care sector in the S&P 500:
Coefficient Std. Error p-value
MKT 0.715 0.065 0.000
SMB -0.221 0.132 0.100
HML -0.075 0.079 0.342
 The estimate for ெ௄் is 0.715, which is below 1. We may classify this ETF as
moderately defensive
 The estimate for ௌெ஻ is -0.221, which is negative with a p-value of 0.100, i.e., not less
than 0.05. We classify this ETF as behaving like a portfolio that is neither overweight in
small or big firms – or as neutral in the size factor.
 The estimate for ுெ௅ is -0.075, which is negative with a p-value of practically 0.079,
i.e., not less than 0.05. We classify this ETF as behaving more like a portfolio that is
neither overweigh in value firms nor growth firms – or as neutral in the value factor.