Equity Research Report on a Portfolio of Equities, ETFs, and Mutual Funds

Equity Research Report on a Portfolio of Equities, ETFs, and Mutual Funds

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Abstract

This paper presents an equity research report for F&H Capital, a global investment firm located in New York. The report focuses on a portfolio of equities, exchange-traded funds (ETFs), and mutual funds. It uses the Capital Asset Pricing Model (CAPM) and the Fama-French Three-Factor model to assess the predictability of the securities in the portfolio. The paper includes an analysis of the price and return series of the portfolio, as well as the results of estimating the CAPM and Fama-French Three-Factor models. The report also discusses the similarities and differences between the two models and a test for serial correlation and heteroskedasticity in the models' residuals.

Introduction

F&H Capital is a global investment firm in New York that tracks the US and global equity markets and makes recommendations to the trading departments. The firm uses the Capital Asset Pricing Model (CAPM) and the Fama-French Three-Factor model to analyze securities. This paper presents an equity research report for a portfolio of equities, ETFs, and mutual funds using these two models.

Security Selection and Portfolio Construction

From Yahoo Fund Screener, ten securities were selected from the following class of assets:

Three equities listed on the NYSE or NASDAQ

Three ETFs listed on the NYSE or NASDAQ

Four mutual funds domiciled in the US

For each security, the daily adjusted close price series was downloaded from 1 January 2005 to 30 June 2019. The daily price series was transformed into monthly price series for each fund in the portfolio, and the monthly price series was transformed into return series.

A portfolio was constructed with the ten securities using the following weights:

Equities: 30%

ETFs: 30%

Mutual funds: 40%

The rebalancing of the portfolio was set to one year.

Time Series Visualisation

The monthly price series and return series of the portfolio were plotted. The patterns observed in the price and return series were discussed using relevant theories and economic events that explain the patterns.

Asset Pricing Regression

The monthly Fama-French-Three factor return series was downloaded directly into R. The observations were restricted from 1 January 2005 to 30 June 2018. A CAPM regression was estimated using equation (1), and the coefficients were interpreted. A Fama-French Three-Factor regression was estimated using equation (2), and the coefficients were interpreted.

The results of the two pricing models were compared, and the similarities and differences were discussed. The R-Squared and F-Statistics were commented on. Tests for serial correlation and heteroskedasticity were performed on the models' residuals.

Results and Discussion

The results of estimating the CAPM and Fama-French Three-Factor models are presented in this section, along with a discussion of the similarities and differences between the two models. The CAPM regression was estimated using equation (1); the results are shown in Table 1.

Table 1: CAPM Regression Results

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Coefficient

Standard Error

Statistic

Alpha