Finance Project: Global Diversification

Motivation:

1. Investigate whether investing globally would lead to lower risks and higher long-term returns

2. Measure performance and effectiveness during Covid (stock market experience high volatilty)

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Project Preview:

1. Programming Language: Python

2. Data extracted from Yahoo Finance

• Link: https://finance.yahoo.com/

3. Details of the 3 chosen ETFs for analysis:

• SPDR S&P 500 ETF (track S&P 500 index) --> United States
• iShares Core MSCI Europe ETF (tracks the MSCI Europe IMI) --> Europe
• iShares Asia 50 ETF (tracks S&P 500 Asia index) --> Asia

4. Initial Hypothesis: Investing globally WILL lead to a DECREASE in investment risks and an INCREASE in returns

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Project Details (look into ipny file):

1. Descriptive Statistics and Graphs

• Daily mean & Annual Return
• Standard Deviation

2. Correlation

• Correlation Matrix & Heatmap
• Spearman Rank Correlation Test

3. Portfolio Comparison (Equal vs Diversified)

• Hypothesis Test (t-test & f-test) with 5% significance level

4. Economic Significance

• Returns & Risks (std) on each ETF
• Portfolio Returns & Risks (std) & Sharpe ratio

5. CAPM Model

• Regression Analysis

6. Fama-French-Carhart 4-Factor Model

• Constant: pos: outperfomed market / neg: underperformed market
• Mkt-Rf: pos: co-movement with market / neg: move in opposite direction from market
• SMB: pos: small cap / neg: large cap
• HML: pos: value stocks / neg: growth stock
• Mom: pos: momentum stocks / neg: X momenum stocks

7. Portfolio Sort

• Sorts trading days according to trading volumes of all ETFs and examines their return differences between high volume days and low volume days
• Separated into quintiles (5), with 0 being the lowest trading volume, and 4 being the highest

8. Limitations

• Kurtosis (might underestimate / overestimate due to the inclusion of extreme outcomes)

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Conclusion

1. Hypothesis Rejected (Depends on Investor Strategies and their Weight Put on Each Stock/ETF)

2. All ETFs generated loss --> High Correlation among the 3 ETFs (downturn of 1 stock market drags the others)

3. Advanced Models (CAPM & 4-Factor Models) provides better understandings of the ETFs

4. Consider limitations of each project and their potential effects