Project 2: New ESG Index
The goal of this project is to create a new ESG index. To keep the project manageable, you should start with the components of the Dow Jones index and use ESG-relevant information to create a “clean” Dow index. This portfolio will contain the “stars” of the Dow: a portfolio with the most impactful stocks in the Dow. To examine the performance of your new ESG index, compare the performance of your new index with the performance of the Dow “dogs” portfolio.
Impact Investing (FIN 654) Syllabus: Kumar: Fall 2021 8
“Dogs of the Dow” is an investing strategy that attempts to identify under-valued stocks within the 30 stocks that form the Dow Jones index. The belief is that stocks with the highest dividend yield are likely to be most under-valued. Consequently, a portfolio of these under-valued stocks would outperform the Dow Jones index.
You should also compare the performance of the new ESG and Dow Jones indices.
1. Compare the performance of the ESG index with (i) the “Dogs” portfolio and (ii) the overall Dow Jones Index.
2. Construct various Long-Short portfolios to exploit the observed performance differences. Re- port the risk and performance estimates of various Long-Short portfolios.
Report raw as well as risk-adjusted performance measures of all portfolios, along with their risk estimates. At least the following risk and performance measures must be included: (i) mean monthly returns, (ii)standard deviation of returns, (iii) beta relative to the market, (iv) idiosyncratic volatility using CAPM, (v) Sharpe ratio, (vi) Jensen’s alpha (same as CAPM alpha), (vii) betas relative to all factors in the four-factor model, and (viii) four-factor alpha.
Please submit a short report (approximately 2 pages, double-spaced) that contains all of your results and a brief discussion of interesting observations from your findings.
Data Source: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data library.html or http://finance.yahoo.com. You can also use data from Wharton Research Data Services (WRDS). You may be able to get a free account at WRDS.
All that’s taken care of. Now it’s just running CAPM and 3-factor regressions to get the performance.
