22 Jul DESCRIBE FOUR SPECIFIC CONCERNS ABOUT SARAS TEST PROCEDURES AND MODEL DESIGNS.
s quantitative analysis has developed a portfo Show more Part 1 (7 marks) Sara Wong National Australian Banks quantitative analysis has developed a portfolio construction model about which he is excited. To create the model Sara made a list of the stocks currently in the ASX SPI 200 Index and obtained annual operating cash flow price and total return data for each issue for the past five years. As of each year-end this universe was divided into five equal-weighted portfolios of 40 issues each with selection based solely on the price/cash flow rankings of the individual stocks. Each portfolios average annual return was then calculated. During this five-year period the linked returns from the portfolios with the lowest price/cash flow ratio generated an annualized total return of 18.5% or 3.9% percentage points better than the 14.6% on the ASX SPI 200 Index. Sara also noted that the lowest price-cash flow portfolio had a below-market beta of 0.88 over this same time span. (1.1) Briefly comment on Saras use of the beta measure as an indicator of portfolio risk in light of recent academic tests of its explanatory power with respect to stock returns. [You should refer your discussion to the existing literature such as Fama E. and K. French 1993. Common risk factors in the returns on stocks and bonds Journal of Financial Economics 33 (1): 3-56.] (1.2) You are familiar with the literature on market anomalies and inefficiencies. Against this background discuss Saras use of a single-factor model (price-cash flow) in his research. [You should refer your discussion to the existing literature such as Jacobs B. and K. Levy 1988. Disentangling Equity return regularities: new insights and investment opportunities Financial Analysts Journal 44 (3): 18-43 (1.3) Identify and briefly Describe four specific concerns about Saras test procedures and model designs. [The issues already discussed in your answers previous parts may not be used in answering here. These other issues may include issues such as survivorship bias look-ahead bias improper reference portfolio ignoring the real world time period holdout sample market efficiency and data mining. You need to cite relevant publications when you discuss the above-mentioned issues in your discussion.] Show less
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