Segal Graduate School of Business Final Projects

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COMMODITIES AND THEIR ROLE IN PORTFOLIO OPTIMISATION BETWEEN 2002-2019

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

In this research, it is investigated whether adding a commodity index, a passive investment, creates more value to the portfolio of bonds and stocks. Since the study time frame includes financial crisis, I separated time into the pre-crisis period, period including the financial crisis, post-crisis period and the full period.

My finding was that the commodity index did not offer that much to the betterment of the portfolio’s performance, especially after the financial crisis to the present. The index improved the return and risk of the portfolio only in the pre-crisis period. The commodity index is highly volatile, and it is not recommended for mean-variance investor’s portfolio.

Also, for portfolio optimisation, mean-variance method has been used, and efficient frontiers have been generated.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Carlos da Costa
Department: 
Beedie School of Business-Segal Graduate School

OPTIMUM PORTFOLIO CONSTRUCTION CONSIDERING VALUE AT RISK USING GENETIC ALGORITHMS AND MONTE CARLO SIMULATION

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

Determining the best portfolio out of set of alternative investment opportunities to optimize risk-adjusted return and value-at-risk simultaneously is a challenging issue for many practitioners. In recent years, the application of non-conventional methods for portfolio optimization problems has grown in importance in the investment industry. As an effective alternative to traditional optimization techniques for handling the computationally complicated portfolio optimization problems, many nature-inspired optimization methods have emerged and have been developed by researchers. In this thesis, a novel algorithm is suggested to construct a promising portfolio in terms of Mean return- VaR and Sharpe ratio-VaR from a limited number of securities from a set of available equities. The algorithm consist of three stages of refining. The first stage is to select 60 stocks out of all the securities in S&P500 index based on fundamental factors using factor analysis. In the second stage, the proposed algorithm employs a Markowitz' mean-variance optimization model to refine the quality of initial population of portfolios of 30 stocks and improve the convergence behaviour of the algorithm. And in the third stage, a state-of-the-art genetic algorithm is applied to determine an optimized portfolio of assets in terms of risk-adjusted return and value at risk. The novel genetic algorithm developed in this research benefits from an innovative solution representation which make GA searches over both discrete and continuous variables in the problem of optimizing stock and industry selection and weight allocation. In this study, the outperformance and effectiveness of the proposed algorithm are demonstrated by comparing annual return, annual volatility, Sharpe ratio, Jensen's alpha and beta of a constructed portfolio with the S&P 500 index and Mean-Variance constructed portfolio. The robustness of our evolutionary algorithm is verified by evaluation of the results in both in-sample and out-sample data.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Andrey Pavlov
Department: 
Beedie School of Business-Segal Graduate School

POST FINANCIAL CRISIS M&A PERFORMANCE IN THE US: A DEEPER DIVE INTO THE PHARMACEUTICAL AND OIL & GAS INDUSTRY

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

The goal of this paper was to assess the performance of the M&A activities in the pharmaceutical and oil & gas sector in the US public market after the financial crisis of 2008. As historically long-term post-M&A return has been negative, we delved into ascertaining this result in these two sectors.

For analysing the performance, we have taken a sample of public companies domiciled in the US who has executed M&A activities within 2010-2017 with a deal size greater than 10 million USD. The excess return has been calculated for these stocks using monthly calendar time portfolio and Fama-French Four Factor model (using both equal- weighted and value-weighted method for the constructed portfolio) and our results re- affirms in almost every case that there is no significant positive performance for M&A activities in both pharmaceutical and oil & gas sector.

This study illustrates that historical underperformance of M&A activities persists in oil & gas and pharmaceutical sector; these sectors have been able to generate a positive return through M&A activities.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Dr. Victor Song
Department: 
Beedie School of Business-Segal Graduate School

MANAGEMENT DIVERSITY AND FIRM PERFORMANCE

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

We introduce a diversity measure of the top management team based on three attributes: compensation, gender and age. On average, firms with greater diversity of the top management team have a positive relation with abnormal returns based on the Fama- French 3-Factor model. However, our calendar-time valued-weighted portfolio approach shows that the relation between the diversity measure and abnormal return is negative. Overall, we conclude that the relation between diversity of the top management team and firm performance is not robust.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Amir Rubin
Department: 
Beedie School of Business-Segal Graduate School

INSTITUTIONAL OWNERSHIP, FIRM SIZE AND EXCESS RETURN

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

The objective of this study is to analyze the effect of the level of institutional ownership on firms’ stock returns regardless of firm size from 1981 to 2018. We find that higher institutional ownership is associated with higher out-of-sample abnormal returns after we control for possible size effects. Stocks with low levels of institutional ownership underperform compared to those with higher levels.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Amir Rubin
Department: 
Beedie School of Business-Segal Graduate School

Institutional Investors’ Stock Picking Ability and Idiosyncratic Risk

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

Focusing on trades of institutional investors from 1980 to 2012, this study examines the stock-picking ability of institutional investors. We find that stocks bought by institution investors outperform stocks sold by institutional investors in the pre-1995 period. Consistent with a costly arbitrage equilibrium in which arbitrage costs insulate mispricing, the outperformance is larger for stocks with higher idiosyncratic volatility. The stock picking ability of institutional investors declines in the post-1995 period. We also find that investment firms have stronger stock-picking ability than banks and insurance companies. Overall, Banks and insurance companies show negative stock-picking ability, especially for stocks with high idiosyncratic risk. Alternatively, overall, investment firms show strong stock-picking ability for stocks with higher idiosyncratic volatility, and the ability declines in the post-1995 period.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Ying Duan
Department: 
Beedie School of Business-Segal Graduate School

HOW DOES CURRENCY RISK FROM THE EMERGING MARKETS AFFECT RETURNS OF THE U.S. INVESTORS?

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

This paper demonstrates how U.S. stock returns correlate with emerging market stock returns in Brazil, China, Mexico, India and Turkey, and the correlation among these emerging market returns. The emerging market returns have two components: local currency stock market return and exchange rate return. The currency risk is driven by standard deviation and correlation. By breaking down the correlation and standard deviation into foreign exchange rate return and local stock return components, we conclude that emerging markets have diversification benefits.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Dr. Deniz Anginer
Department: 
Beedie School of Business-Segal Graduate School

HEDGING HEALTHCARE LIABILITIES USING A MEDICAL CPI WEIGHTED PORTFOLIO OF HEALTHCARE STOCKS

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

The purpose of this paper is to find a suitable investment strategy to hedge against anticipated and unanticipated changes in medical inflation. These changes pose a challenge to individuals and businesses where medical liabilities play a significant role in an entity’s life. There have been many attempts to create a suitable investment strategy to hedge the surprise changes such as: shorting AAA Corporate bonds and investing in health care mutual funds. However, none have been successful in creating a suitable and successful hedge. In this paper, we are exploring the possibilities of creating a value-based portfolio weighted according to Medical Care Index components to hedge against anticipated and unanticipated changes. After running the regression, we are confident that our portfolio and individual ETFs have no significant correlation with Medical Care Index as well as the Consumer Price Index (CPI). Therefore, using the common stock as a hedging tool is not efficient. For future studies, one can create a balanced portfolio of equities, fixed income, and alternative investment to try to hedge against Medical CPI.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Dr. Peter Klein
Department: 
Beedie School of Business-Segal Graduate School

The Effects of Cash and Stock Consideration on Market Response to Acquisitions of Private and Public Firms

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

This paper investigates the combined effects of the method of payment, cash or stock, and the type of target firm, public or private, on merger announcement returns for US public acquirers between 1994 to 2015. We break down the sample into deciles and quartiles based on the fraction of cash in the offer amount in order to assess which financing mix is most welcomed by the market, resulting in significant positive immediate abnormal returns (BHAR). For both private and public acquisitions, we find that the higher the cash proportion, the higher the BHAR, for both private and public targets, but more so for public targets. This relation between the cash proportion and returns is monotonic. The returns for fully stock-financed acquisitions of public targets are significantly negative, in contrast to studies based on earlier sample periods. In regressions of BHARs for cash quartiles samples, we find that quartiles with relatively more cash have significantly greater returns for both private and public targets.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Alexander Vedrashko
Department: 
Beedie School of Business-Segal Graduate School

Diversification Effects of US Bonds and Global Equities

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2019-12
Abstract: 

The purpose of this paper is to study and compare the diversification effects of the investment in the foreign equity market and the U.S. bond market during the U.S. expansion and recession periods. The concept and test methodology are based on the CJJ paper, but expands to a broader area which covers fixed income, further supported with portfolio optimization test. This paper can provide U.S. investors with insights on the ways to diversify their equity portfolio, especially during the U.S. stock market recession periods.

Results show that both foreign equities and the U.S. bonds can diversify U.S. equity assets. However, the effect of diversification of the foreign equity market experienced a decrease and is also lower than that of the U.S. fixed-income assets. This result also rationalizes the investing behaviour of “flight to quality”.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Dr. Peter Klein
Department: 
Beedie School of Business-Segal Graduate School