According to Frazzini and Pedersen (2014) “Betting against beta”:
High-beta assets are generally over-priced and low-beta assets are under-priced. A trading strategy to capture this opportunity is to short high-beta stocks in the meantime long low-beta stocks. The strategy can be self-financed and involves holding a zero-beta portfolio. Constructing this portfolio involves two steps: 1. Holds a portfolio of low-beta assets, leveraged to a beta of one. 2. Shorts a portfolio of high-beta assets, de-leveraged to a beta of one. The combined portfolio should have a beta of zero and yield superior returns.
Based on stock price data from FTSE index, construct a zero-beta portfolio consisting of high and low beta stocks. You are required to:
Demonstrate implementation of the model in R. This includes showing high beta as well as low beta stocks in the portfolio; explaining rules used for stock selection; building accounting functions that can automatically report daily VaR and various balance sheet items relate to financial reporting.
Evaluate performance of the portfolio between 1st January 2021 and 30th June 2021. Performance should be evaluated on a monetary basis as well as on a return basis, assuming the initial portfolio value is £1,000,000. Performance measures like Sharpe ratios, VaR should also be discussed. Performance of the portfolio should also be compared against FTSE100 during the same period.