Your team has to submit a report of 3 to 5 pages documenting the project and an excel spreadsheet containing key statistics and formulas, following the guidelines below.

This project has to do with creating and back-testing a factor-based long-short multi-asset portfolio. The    portfolio has to be based on at least 2 factors. Your investment universe can include the 10 developed        country equity index futures, for which historical returns were posted on Courseworks. You can also define your own investment universe and download data for it. Your backtest has to be at least 10 years long.

Your goals are as follows:

1.   Construct factor-mimicking portfolios for your investment universe. You can use factors from the literature that was referenced in the lecture notes or create your own. Your portfolio has to be based  on at least two factors; however, only one of them can be either value or momentum included in    the FMP example and HW.

2.   Your factor portfolio should be constructed every month so that you can rebalance your portfolio    monthly. Provide the raw holdings of your factor portfolios in your spreadsheet in the tabs named “Raw factor holdings”.

3.   Estimate a covariance matrix for your assets and re-estimate it every month, using at least 36 months of prior returns. In the excel spreadsheet, provide the annualized volatility of each asset for each month of the back-test in one tab labeled“Volatilities”and provide the correlation matrix of the    assets for the final period only in a tab labeled“Correlations final period”.

4.   Scale each factor portfolio to 1% volatility based on the estimated covariance matrix each month. Provide the resulting holdings in your spreadsheet in the tabs named“factor X 1% vol holdings”.

5.   Combine all your factors based on a weighting scheme of your choice, such as equal weighting, for example, and re-scale the combined portfolio to 1% volatility. Provide the resulting holdings in  your spreadsheet in the tabs named“Final 1% vol holdings”.

6.   Produce the following charts and analytics; formulas must be given in your spreadsheet for at least the last month:

a.   Create a chart showing your final portfolio weights over time [tab name:“weights”].

b.   Create a chart showing monthly cumulative payoffs (growth of $1) of your portfolio as well as each factor that you used [tab name:“return chart”].

c.   For your portfolio, compute the following statistics for the full back-test period. Present these in a tab named“stats”.

i.  Arithmetically annualized return;

ii.  Annualized volatility;

iii.  Annualized information ratio;

iv.  Average drawdown;

v.  Maximum drawdown;

vi.  Turnover.

Please avoid a look-ahead bias: for each month in the backtest you can use only the data that existed prior to that month.

Please describe your work. Your report should cover the following: