Investments and Portfolio Management

FINC3017 Investments and Portfolio Management
Report 2: Factor Backtesting and Performance Measurement

Due: 4pm, 4th November 2019
Word limit: 1,500
Weight: 17%
You are hired as an investment analyst in an Australian systematic asset management firm. Your portfolio
manager asks you to prepare a report which investigates market anomalies in the U.S. equities market.
Specifically, you are to report of the existence and performance of size, value, and low-beta anomalies,
and use your results from single-factor backtesting to provide guidance on the development of a new
smart beta product. Your manager directs you to structure your report in three parts and address the
following points:
Part A – Overview of Market Anomalies
1. Summarise the key characteristics of the following anomalies: (i) Size; (ii) Value; and (iii) Low
Beta. Your summary should include a theoretical justification of each and make reference to key
academic literature.
Part B – Comparing the Size Factor in Australia and U.S.
1. Using the FTST function in Bloomberg, conduct a single-factor smart beta backtest on the Size
anomaly in
a. Australia, and
b. United States of America (U.S.)
2. Use the following parameters for your backtests:
Market Australia U.S.
Universe – S&P/ASX200 – S&P500
Analysis period – Frequency: Monthly
– Start date: Exact – 01/01/01
– End date: Exact – 09/30/19

– Frequency: Monthly
– Start date: Exact – 01/01/01
– End date: Exact – 09/30/19

Analytic parameters – Bucket by Quintiles
– Tick the ‘Break Ties’ box
– Tick the ‘Use Benchmark’ box and
enter ASX200
– Security Weighting: Market Cap
– Model Currency: AUD
– N/A Policy: Exclude
– Grouping: All Universe

– Bucket by Quintiles
– Tick the ‘Break Ties’ box
– Tick the ‘Use Benchmark’ box and
enter S&P500
– Security Weighting: Market Cap
– Model Currency: USD
– N/A Policy: Exclude
– Grouping: All Universe
3. Using the results from your backtests, make the following performance comparisons:
a. Measure the performance of the single-factor backtest in Australia against the passive
investment alternative (i.e. ASX200)
b. Measure the performance of the single-factor backtest in U.S. against the passive
investment alternative (i.e. S&P500)

c. Measure the performance of the single-factor backtest in Australia against the single-
factor backtest in U.S.

Part C – Value and Low Beta Factors in a U.S. Strategy
1. Using the FTST function in Bloomberg, conduct the following two single-factor smart beta
backtest in the U.S. using the same parameters as in Part B-2:
a. Value anomaly
b. Low Beta anomaly
2. Using the results from your backtests in C-1, measure and discuss the performance of the Value
and Low Beta single-factor backtests against the passive investment alternative (i.e. S&P500
benchmark), and against each other.
3. With reference to your Value and Low Beta single-factor smart beta backtests, propose and justify
a multi-factor smart beta strategy. Discuss why it should outperform a single-factor smart beta
strategy.
4. Briefly describe any limitations to your analysis that should be considered alongside your
findings.

 


Your report should conclude with an overall summary of your results.
You will need to access Bloomberg in order to complete your report. It is recommended you do not wait
until the final days prior to submission to begin your report. There are resources on Canvas that you may
find useful in completing this report, particularly the solutions and review of Lab 4 (week 7) tutorial.
Marks will be allocated approximately evenly between each Part. Marks will be awarded for the clarity
of your discussion, the structure of your report and how you present your findings. Submit your report
through the appropriate Turnitin link as a word or pdf document. Please use graphs and/or tables to support
your discussion but do not include the raw data in your written report. Please use minimum 11pt font with
2cm margins and include all references, if required, in a bibliography. Bibliography does not count
towards your word limit. Written reports must be submitted via the Turnitin link labelled ‘Report 2’.