Financial decisions often deal with risk and uncertainty. Unfortunately, human beings are not very good at assessing probabilities. In particular, people are unable to accurately assess probabilities that are close to zero or are slightly below one. As a result of this, people often make mistakes when judging probabilities, and these mistakes may be perceived as irrational decisions.
For this Project Assignment, you will examine the risk and return characteristics of various publicly-traded firms. You will obtain the monthly prices for these firms and compute the risk and performance measures for each of these firms. You will also compute the risk and performance measures of various portfolios.
This week’s Learning Materials will help you with this Assignment.
Identify 12 (or more if you want the project to be more realistic) publicly-traded firms with which you are familiar. Obtain the monthly prices for these firms and compute the following risk and performance measures for each of those firms.
Next, using your risk and performance measures, develop a trading strategy, i.e., use past data to rank firms such that higher-ranked firms are likely to perform well in the future while lower-ranked firms would perform poorly. Create a zero-cost portfolio in which you hold a Long position in firms in the top one third and a Short position in the firms in the bottom third. Compute all the risk and performance measures for this new portfolio.
The data for the project can be obtained from:
Write a short report (in a Word document, not more than 5 pages, double-spaced) that contains the following: