Style and Portfolio Performance Evaluation Project

FI 8240 Global Portfolio Management
Fall Semester 2015, Dr. Kini

Lan Luo
Thuy Tien Ho
Xiangbo Sun

SUMMARY
We have developed style and portfolio performance evaluation based on our analysis from Excel results for mutual fund A, B and C. In this analysis two different passes were made, where the major change was the number of indices used in creation of the style analysis model. In the first pass the indices used were the large cap sp500, mid cap md400, small cap sc600, which are all commonly used proxies for the market in which the investor is operating, and the risk free rate. In this analysis, the predicted return using a weighted average of the market indices, the error between the investor’s actual return and predicted return, the sum of this error, the variance on this error (residual variance), and the variance on the return itself were determined from the data provided. By using Excel’s Solver tool, the minimum residual variance was determined by changing the weights of the market indices and thus creating an opportunity for the predicted return values to approach (converge) to the actual return and obtain a more optimal portfolio. This in turn provides the analyst with the tools to determine how well the model can predict the overall variance in the actual return of an investment in a particular fund. Once the optimal weights are determined, the variances stated above are used to determine the percentage of the return variance that can be explained by the model (the style/r^2 value) and the percentage that can be explained by the investor’s selection strategy. This is completed for all three funds to determine whether or not the investor is using a passive or active strategy for investing in these funds. In addition the three FAMA FRENCH factors (mktrf – Market Return – Risk Free Rate), smb