Annual data on market portfolio, risk free rate, and anomalies (VW portfolios only) can be
downloaded from Ken French’s online data library. The sample period is 1927 – 2020.
Implementation
Part 1: Consider the following four investments:
1) Investing in the market portfolio
2) Investing in the T-bills
3) Investing in small stocks
4) Investing in high momentum stocks (e.g., stocks that do well in the past)
• Document the risk return characteristics of the above four investments, including plots
of annual returns and cumulative returns as well as a table that reports summary
statistics of different investments such as mean, standard deviation, skewness, kurtosis,
maximum drawdown, beta, and Sharpe ratio.
• Plot the efficient frontier with market and T-bills. This is the benchmark.
• Plot the efficient frontier with small stocks and T-bills, and check if the size anomaly can
be used to expand the benchmark investment opportunity set
• Plot the efficient frontier with high momentum stocks and T-bills
• Plot the efficient frontier with small stocks, high momentum stocks and T-bills.
• You need to put different efficient frontiers on the same graph so the reader can
compare them easily.
Part 2: Using the portfolios sorted on size and momentum as testing assets, evaluate the
ability of CAPM to explain the return differences in these portfolios
• Plot the security market lines for the two sets of testing assets
• Use the cross-sectional regression approach and Fama MacBeth regression approach to
evaluate the performance of the CAPM

Sample Solution