Portfolio Management and Performance Evaluation Assignment

Michael O'Higgins's book, Beating the Dow, was published in 1990 (and hence written in 1989 or earlier). In it he advocates the Dogs of the Dow strategy that involves holding each year the 10 stocks in the Dow Jones Industrial Average (‘DJIA') with the highest dividend yield as of the end of the previous year. Invesco has an ‘enhanced unit investment trust' that expands on this ‘big cap value' strategy by also holding the 15 highest dividend-yield stocks in the S&P 500 and the 20 highest dividend- yield stocks in the EAFE index, with equal dollar amounts invested in all three markets. Since it consists of 45 stocks (10 from the DJIA + 15 from the S&P 500 + 20 from EAFE), it is titled the "Global 45 Dividend Strategy Portfolio". Use the data in the spreadsheet for this assignment to analyze the performance of this strategy.

(a) Determine the 30 yearly returns for a composite benchmark that consists of weighting the DJIA by 1/3, the S&P 500 by 1/3, and the EAFE by 1/3. After doing so determine the 30 yearly tracking error returns (also known as active returns) for the Global 45 Dividend Strategy Portfolio using this benchmark.

(b) Determine (i.) the arithmetic average tracking error return, (ii.) whether the strategy outperformed the benchmark based on this average, (iii.) the number of years it outperformed the benchmark, and (iv.) the percentage of the years it outperformed the benchmark.

(c) Determine the standard deviation of the tracking error returns using the ‘STDEV' function in Excel, and divide this value into the average annual tracking error return from (b). This number, known as the portfolio's "Information Ratio," can be used "for comparing skill across managers" as it looks at returns and risks (Shein, Journal of Investment Consulting, June 2000). If it has a value of at least .50, it indicates high performance where the manager is roughly in the top quartile of all portfolio managers. How would you assess the performance of the strategy based on its Information Ratio?

Attachment:- Assignment_Data.xlsx