MATHGR5380
Project 2: Dynamic Factor-Based GTAA with 1% Risk and Monthly Rebalancing
Due date 4/19/2021
Your team must submit a report of up to 4 pages documenting the project and an excel spreadsheet
containing key calculations, following the guidelines below. The formula that you used for each calculation
has to be shown for at least one period.
This project has to do with creating and back-testing a dynamic factor-based long-short GTAA portfolio. The
goal is to design and test the efficacy of at least one new factor or strategy, that was not included in the
GTAA homework assignments. Timing one or both of the factors that were included in the GTAA HW2
(value and momentum) by using, for example, volatility regimes would be considered a new strategy. Your
investment universe can include the 10 developed country equity index futures, for which some data was
posted on CourseWorks. You can also define your own investment universe and download data for it.
First, you will need to create all building blocks of your strategy. Steps 1 through 4 will help you get started:
1. Construct a factor-based portfolio for your investment universe. You can use one of the factors from
the literature that was uploaded to CourseWorks or create your own; however, you cannot use the
value and momentum factors covered in class and practiced in the GTAA homework, unless there is
an additional element, such as timing of these factors. Your factor portfolio should be constructed
monthly so that you can rebalance your portfolio on a monthly basis. Give the holdings of your
factor portfolio in your spreadsheet in the tabs named “factor holdings.”
2. Estimate your own risk model (covariance matrix, COV) for your assets for every month of the
backtest. Please use at least 36 months of prior returns to estimate COV for the first month of the
back-test and re-estimate it every month by including one more month of the data. Please avoid a
look-ahead bias: for each month in the backtest you can use only the data that existed prior to that
month. 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”.
3. Scale the factor portfolio to 1% risk based on the estimated COV each month. Give the resulting
holdings in your spreadsheet in the tab named “factor holdings 1pct”.
4. Produce the following charts and analytics for your portfolio:
a. Create a chart showing portfolio holdings (weights) over time [tab name: “holdings chart”].
b. Create a chart showing monthly cumulative returns of your portfolio [tab name: “return
chart”].
c. For your portfolio (at 1% risk), compute the following statistics for the full back-test period.
Present these in a tab named “stats”.
i. Arithmetically annualized return;
ii. Annualized realized risk;
iii. Return-to-risk ratio based on the realized return and risk;
iv. Geometrically annualized return;
v. Average drawdown;
vi. Turnover.
Please describe your work. Your report should cover the following:
•
•
Description of the strategy
A brief summary of the backtest results
Make sure you use only the information available up to the point in time when you construct your
portfolio each month.
Project grade will not depend on the active returns that your portfolio produced.