Portfolio Analysis
Added on 20190916
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3) Interpret the output from the market model for each of the mutual funds. Is it a goodmodel? The coefficient of determination tells me the percentage of variation in the dependentvariable which is explained by all independent variables considered in the model.A percentageof 75% or greater indicates that fitted model is a good fit to the data.In model 1, coefficient ofdetermination, R square equal to 0.2600 I can say that 26.2% variation in the dependent variable,ALFAX is explained by all independent variable VTI. This percentage is very less and hencefitted model is not considered a good fit to the data. In model 2, coefficient of determination, Rsquare equal to 0.7361 I can say that 73.6% variation in the dependent variable, PRDSX isexplained by all independent variable VTI. This percentage seems reasonable and hence fittedmodel is considered a good and better fit to the data as compared to model 1. What does your output tell you about each of the funds and how do they compare? In model 1, my dependent variable is ALFAX and independent variable is VTI. VTI isthe Monthly return to the Vanguard Total Market Index. The regression equation for this modelis given by: ALFAX = 0.001174 + 0.8832*VTI. In model 2, my dependent variable is PRDSXand independent variable is VTI. PRDSXis the Monthly return to the T Rowe Price  Small CapMutual Fund. VTI is the Monthly return to the Vanguard Total Market Index. The regressionequation for this model is given by: PRDSX = 0.0000010026 + 1.0667*VTI.
In model 1, Average Monthly Excess Return is 0.011255 with Standard Deviation of0.050215. In model 2, Average Monthly Excess Return is 0.01217516 with Standard Deviationof 0.030184. The high value of Standard Deviation indicates that mean is not reliable.Further, how would you compare each of the funds to a strategy that invested solely inVTI? Support your discussion.In model 1, with a unit increase in VTI there is 0.883 to units increase ALFAX. In model2, with a unit increase in VTI there is 1.0667 to units increase PRDSX. Hence I can say that VTIhas a stronger effect on PRDSX as compared to ALFAX. 5) Interpret the beta coefficients for each fund in regards to mutual fund strategy. In Model 1, my dependent variable is ALFAX and independent variables are VTI, SMB,HML and UMD. Regression equation is given as: ALFAX = .002906 + 0.7694*VTI +0.5869*SMB – 0.4083*HML 0.06557*UMD. With a unit increase in VTI there is 0.7694 unitsincrease in ALFAX. With a unit increase in SMB there is 0.5869 units increase in ALFAX. Witha unit increase in HML there is 0.4083 units decrease in ALFAX. With a unit increase in UMDthere is 0.06557 units decrease in ALFAX. In Model 2,my dependent variable is PRDSX andindependent variables are VTI, SMB, HML and UMD. Regression equation is given as: ALFAX= 0.009895 + 0.3385*VTI + 0.7136*SMB – 0.1715*HML + .0759*UMD. With a unit increasein VTI there is 0.3385 units increase in ALFAX. With a unit increase in SMB there is 0.7136
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