1. Revisit the all-weather portfolio you crafted. Create the maximum Sharpe portfolio's daily return dataframe and then merge it with Fama French's five return factors.

Run the app to see the outputs

Press the run button in the top right corner

2. Examine visually the correlation between portfolio and factor returns.

Run the app to see the outputs

Press the run button in the top right corner

3. Regress the portfolio return on each factor and assess the portfolio's sensitivity to each factor. For the curious, optional challenge, how do you test whether the intercept (i.e., alpha) is significantly different from the risk-free rate for a single-factor regression?

Run the app to see the outputs

Press the run button in the top right corner

Run the app to see the outputs

Press the run button in the top right corner

4. Regress the portfolio return on all factors and assess the portfolio's sensitivity to factors. For the curious, optional challenge, how do you test whether the intercept (i.e., alpha) is significantly different from the risk-free rate for a multi-factor regression?

Run the app to see the outputs

Press the run button in the top right corner

5. Optional Bonus. Construct a multi-factor pricing model for assets based on Arbitrage Pricing Theory. The Arbitrage Pricing Theory (APT) is a theory of asset pricing that holds that an asset’s returns can be forecasted with the linear relationship between an asset’s expected returns and the macroeconomic (e.g., GDP, changes in inflation, yield curve changes, changes in interest rates, market sentiments, exchange rates) or firm-specific statistical factors that affect the asset’s risk. Hint: You can draw these variables straight into your Jupyter notebook via Refinitiv API.

The APT is a substitute for the Capital Asset Pricing Model (CAPM) in that both assert a linear relation between assets’ expected returns and their covariance with other random variables. (In the CAPM, the covariance is with the market portfolio’s return.) The covariance is interpreted as a measure of risk that investors cannot avoid by diversification. The slope coefficient in the linear relation between the expected returns and the covariance is interpreted as a risk premium ~ "Arbitrage Pricing Theory (Guberman and Wang 2005).