Modeling Stock Returns and Optimizing Bond Portfolios

State Street Global Advisors (SSgA) is the largest institutional asset manager in the world. As such, SSgA is interested in modeling monthly stock returns and managing optimal bond portfolios. We will all be working on two related projects:

  • Stocks project: Develop a model to evaluate and rank future performance of stocks, based on some known factors, such as value, growth, sentiment, and quality. Since the data is extremely noisy and will likely cause the model to change from month to month, we are also interested is making this model smooth over time to minimize stock trading costs. Regression will be our primary tool for model building; however, alternatives such as artificial neural networks will be examined as well.
  • Bonds project: A bond is a measure of debt issued by an institution. Investors commonly include bonds in their portfolios due to the fact that they are less volatile than stocks. However, bonds are associated with a risk of default, measured by credit ranking agencies, from AAA — least risky to D — most risky. This project will analyze investment grade bonds: A and BBB bonds issued by non-financial companies. For each bond issuer, State Street has computed a score, which tries to predict how well the bond will perform compared to treasury bonds. Given 160 months of benchmark portfolio weights, returns, and these scores, we seek to construct a portfolio that beats the corporate bond index. To verify the results, comparisons of our rankings against the benchmark returns and simulations will be conducted.