Table of Contents

Executive Summary

Selection of 10 stocks

Covariance Matrix Approaches

Results: Monthly (Short Sales & No Short Sales)

Results: Quarterly (Short Sales & No Short Sales)

Covariance Estimation Technique Comparison- T-test

Performance of GMV Portfolio w/ Benchmark Comparison

Conclusion
 Executive Summary
Importance of Research
Given the high volatility of the market due to economic downturn, rising interest
rates, it is difficult to determine what investment products to invest in.

Aim of the Report

Analyze Top 10 companies in the S&P 500 index that have high dividend yield

Companies that have high dividend yields are usually companies that have
stable cash flow for the past several years. Therefore, it would be interesting

to compare the returns between high dividend yield stocks that pays
dividends or solely depending on S&P 500's capital gain.
Selected portfolio would consists of the top 10 highest dividend yield stocks

within S&P 500 index.

Dividend Yield is at least 5% and above
 Executive Summary
Conduct of Report
The monthly returns of the 10 chosen high dividend yield stocks and the returns of S&P 500
index are analysed over a 10 year period starting from January 2013 to December 2022.

All data are retrieved from Wharton Research Data Services (WRDS) to ensure the credibility,

accuracy and standard of the data used.

Three different models would be adopted to estimate the results:

Traditional Sample Method

Constant Correlation Model

Market Model
Estimates are then used to compute each stocks weightages of the GMV portfolio for all

three methods. Initial portfolio weights would be calculated using only data from the
lookback period of Jan-2013 to Dec-2017. This is rebalanced for every month and quarter.
Paired T-tests will be subsequently used to determine which portfolio provides the best

results and determine whether a portfolio constructed from High Dividend Yield stocks
would be better than the S&P 500 index
Selected stocks for GMV Portfolio
STOCKS TICKER DIVIDEND YIELD (19.11.2023)

A T & T INC T 6.98%

ALTRIA GROUP INC MO 9.60%

ANNALY CAPITAL MANAGEMENT INC NYL 14.60%

BOSTON PROPERTIES INC BXP 7.12%

CROWN CASTLE INTL CORP NEW CCI 6.18%

KEYCORP NEW KEY 6.66%

KINDER MORGAN INC KMI 6.66%

SIMON PROPERTY GROUP INC NEW SPG 6.25%

VERIZON COMMUNICATIONS INC VZ 7.34%

W P CAREY INC WPC 7.58%

Covariance Matrix
Approaches
Traditional Sample Method

1. Selection and Reliability: The method involves selecting a subset of stocks from a larger population to
estimate characteristics of the whole market. The reliability of this method depends on the stability of the
joint distribution of returns on the selected stocks.
2. Covariance Matrices: Covariance matrices, which measure how changes in one variable are associated with
changes in a second variable, are used in this method. Specifically, they measure the dispersion, or spread,
of the returns of the selected stocks.
3. Limitations: The inverse of the covariance matrices cannot be calculated if they are singular, which can
occur when the number of observations used in the analysis is much larger than the number of stocks
chosen for the computations. This is a limitation of the traditional sample method
Covariance Matrix
Approaches
Constant Correlation Model

1. Portfolio Optimization: By computing variances and covariances of securities based on a fixed mean
correlation, the CC model aids in portfolio optimization, enabling the selection of a diversified portfolio for
maximum return at a given risk level.
2. Simplified Assumption: The CC model simplifies portfolio selection by assuming that the correlation of
returns between any pair of different securities is constant.
3. Forecasting Advantage: Despite its simplicity, the CC model often produces better forecasts of future
correlation matrices compared to other models, making it a valuable tool in financial planning and
investment strategy.
Covariance Matrix
Approaches
Market Model

1. Linear Relationship: The Market Model assumes a linear relationship between the return of a stock and the
return of the market. This means that if the market’s return increases or decreases, the return of the stock
will also increase or decrease respectively.
2. Beta Coefficient: The model includes a term known as the ‘beta’ coefficient. This coefficient measures the
sensitivity of the stock’s return to changes in the market’s return. A stock with a high beta is more sensitive to
changes in the market’s return compared to a stock with a low beta.
3. Error Term: The model also includes an error term to account for other factors that may affect the stock’s
return but are not included in the model. This could include company-specific news or events.
Results; Monthly,
Short Sell
Traditional Method
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of -0.1226 0.3159 0.2125 0.0248 0.0606 0.0773 -0.0328 0.0615 0.2053 0.1977
period

End of -0.1222 0.3191 0.2130 0.0248 0.0610 0.0764 -0.0370 0.0613 0.2039 0.1996
period

Constant Correlation Model

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of 0.0495 0.2481 -0.0293 -0.0090 0.0655 0.0641 0.0106 0.1864 0.2880 0.1261
period

End of
period 0.0493 0.2509 -0.0300 -0.0089 0.0657 0.0629 0.0078 0.1869 0.2878 0.1275
Results; Monthly,
Short Sell
Market Model
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0340 0.2353 -0.0369 0.0263 0.1112 0.0788 0.0264 0.1630 0.2399 0.1219

End of
period 0.0339 0.2375 -0.0375 0.0266 0.1116 0.0778 0.0245 0.1631 0.2393 0.1232

Market Model - Covariance & Variance

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0347 0.2342 -0.0358 0.0267 0.1109 0.0788 0.0268 0.1628 0.2390 0.1219

End of
period 0.0347 0.2370 -0.0362 0.0266 0.1112 0.0800 0.0265 0.1624 0.2348 0.1228
Results; Monthly,
Short Sell
Market Model
Constant Correlation
Traditional Method Market Model (Covariance and
Model
Variance)

Return 0.0505% -0.2282% -0.0834% -0.0810%

Variance 0.0889% 0.1112% 0.0775% 0.0784%

By analyzing the results for the monthly returns of the 10 stocks from the 4 different methods, with short sell, the Market model came
out with the lowest variance of 0.0775% while Traditional method yield the best return of 0.0505%
Results; Monthly,
No Short Sell
Traditional Method
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0171 0.3344 0.1425 0.0216 0.0444 0.0844 0.0016 0.0546 0.2393 0.0601

End of
period 0.0171 0.3365 0.1423 0.0218 0.0448 0.0831 0.0014 0.0545 0.2378 0.0606

Constant Correlation Model

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0515 0.2307 0.0020 0.0001 0.0470 0.0712 0.0491 0.1684 0.2726 0.1073

End of
period 0.0514 0.2329 0.0020 0.0001 0.0467 0.0702 0.0478 0.1686 0.2720 0.1084
Results; Monthly,
No Short Sell
Market Model
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0307 0.2302 0.0030 0.0131 0.1048 0.0824 0.0480 0.1460 0.2335 0.1083

End of
period 0.0308 0.2322 0.0030 0.0131 0.1049 0.0814 0.0467 0.1460 0.2327 0.1093

Market Model - Covariance & Variance

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0313 0.2293 0.0031 0.0136 0.1047 0.0820 0.0480 0.1464 0.2328 0.1088

End of
period 0.0314 0.2313 0.0031 0.0136 0.1048 0.0810 0.0467 0.1463 0.2319 0.1098
Results; Monthly, No
Short Sell
Market Model
Constant Correlation
Traditional Method Market Model (Covariance and
Model
Variance)

Return 0.2271% -0.1075% -0.0005% 0.0010%

Variance 0.0984% 0.1161% 0.0806% 0.0813%

By analyzing the results for the monthly returns of the 10 stocks from the 4 different methods, with no short sell. The market model

came out with the lowest variance of 0.0806% while Traditional method yield the best return of 0.2271%
Results; Quarterly,
Short Sell
Traditional Method
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of -0.1131 0.3156 0.2160 0.0246 0.0595 0.0793 -0.0472 0.0632 0.2008 0.2011
period

End of -0.1123 0.3196 0.2166 0.0263 0.0589 0.0820 -0.0506 0.0633 0.1956 0.2006
period

Constant Correlation Model

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of 0.0513 0.2503 -0.0308 -0.0096 0.0658 0.0638 0.0078 0.1894 0.2821 0.1298
period

End of
period 0.0512 0.2532 -0.0316 -0.0095 0.0660 0.0627 0.0051 0.1899 0.2819 0.1312
Results; Quarterly,
Short Sell
Market Model
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of 0.0353 0.2374 -0.0378 0.0268 0.1101 0.0807 0.0252 0.1638 0.2349 0.1238
period

End of
period 0.0352 0.2396 -0.0385 0.0271 0.1106 0.0797 0.0233 0.1639 0.2342 0.1250

Market Model - Covariance & Variance

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0360 0.2362 -0.0367 0.0271 0.1098 0.0807 0.0257 0.1635 0.2340 0.1237

End of
period 0.0359 0.2385 -0.0374 0.0275 0.1103 0.0798 0.0237 0.1636 0.2333 0.1249
Results; Quarterly,
Short Sell
Market Model
Constant Correlation
Traditional Method Market Model (Covariance and
Model
Variance)

Return 0.1025% -0.2371% -0.0877% -0.0851%

Variance 0.0899% 0.1116% 0.0779% 0.0788%

By analyzing the results for the monthly returns of the 10 stocks from the 4 different methods, with short sell. The market model came

out with the lowest variance of 0.0779% while Traditional method yield the best return of 0.1025%
Results; Quarterly,
No Short Sell
Traditional Method
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of 0.0198 0.3368 0.1478 0.0260 0.0423 0.0853 0.0000 0.0528 0.2294 0.0599
period

End of 0.0197 0.3388 0.1478 0.0260 0.0427 0.0840 0.0000 0.0527 0.2279 0.0603
period

Constant Correlation Model

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of 0.0536 0.2321 0.0016 0.0000 0.0473 0.0699 0.0480 0.1709 0.2660 0.1106
period

End of
period 0.0534 0.2343 0.0016 0.0000 0.0471 0.0688 0.0467 0.1711 0.2653 0.1117
Results; Quarterly,
No Short Sell
Market Model
Average BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of 0.0334 0.2319 0.0029 0.0138 0.1033 0.0834 0.0470 0.1461 0.2279 0.1102
period

End of
period 0.0334 0.2339 0.0028 0.0139 0.1036 0.0824 0.0458 0.1461 0.2270 0.1111

Market Model - Covariance & Variance

Average
BXP CCI KEY KMI MO NLY SPG T VZ WPC
Weight

Start of
period 0.0338 0.2310 0.0030 0.0144 0.1033 0.0830 0.0470 0.1465 0.2272 0.1107

End of
period 0.0338 0.2330 0.0030 0.0145 0.1035 0.0820 0.0458 0.1465 0.2263 0.1116
Results; Quarterly,
No Short Sell
Market Model
Constant Correlation
Traditional Method Market Model (Covariance and
Model
Variance)

Return 0.2382% -0.1015% 0.0027% 0.0045%

Variance 0.0989% 0.1163% 0.0810% 0.0817%

By analyzing the results for the monthly returns of the 10 stocks from the 4 different methods, with short sell. The market model came
out with the lowest variance of 0.0810% while Traditional method yield the best return of 0.2382%
Paired t-tests on
GMV returns

Using Paired two sample for Mean in Excel, our group conducted t-tests at significance level α=5% for the
monthly returns from the GMV portfolios, to determine whether the performance of portfolio A differs from
portfolio B significantly.
Assumptions: Paired differences are independent and identically normally distributed.
For the t-test:
Null hypothesis: There is no difference in the mean return between GMV portfolio A and GMV portfolio B.
Alternative hypothesis: There is a significant difference in the mean return between GMV portfolio A and
GMV portfolio B.
Paired t-tests on
GMV returns

Analysing the t-tests performed for the GMV portfolios, we can see from the p-value that at a 5% significance level,
there are no instances where any pair produced a significant difference in its mean.
Paired t-tests results
Results of t-test on the monthly GMV returns (Monthly rebalanced)

Allow Short Sell No Short Sell

T-test P-value T-stat P-value T-stat

TM vs CC 0.265337675 1.12454161 0.092807661 1.708459409

TM vs MM (Cov) 0.569014085 0.572714728 0.216088985 1.250402805

TM vs MM (Cov & Var) 0.574512907 0.564560554 0.219778226 1.240289552

CC vs MM (Cov) 0.135793187 -1.512310629 0.225381379 -1.225165949

CC vs MM (Cov & Var) 0.133663446 -1.520752737 0.220944028 -1.237119769

MM (Cov) vs MM (Cov & Var) 0.377543943 -0.889130346 0.461767563 -0.740775675

Paired t-tests analysis

For t-tests of monthly returns (monthly rebalanced), all the p-value of all possible paired tests result in failure to reject the null

hypothesis at a significance level of 95%. Thus, there is no significant difference between the mean returns produced from the
different covariance estimation methods.

For the portfolios that allow short selling, the Traditional Method is selected as the best method since the portfolio has the
highest average p-value (46.962%) and positive t-stat value for the t-tests.

For the portfolios with no short sell, the Market Model (Covariance) has the highest likelihood to be the best method since the
portfolio has the highest average p-value (30.108%) for the t-tests. However, Market Model (Covariance) does have a negative
t-stat value as compared to Traditional Method which returns a positive t-stat value.
Paired t-tests on GMV returns
Results of t-test on the monthly GMV returns (Quarterly rebalanced)

Allow Short Sell No Short Sell

T-test P-value T-stat P-value T-stat

TM vs CC 0.176824004 1.36695981 0.107215146 1.635755252

TM vs MM (Cov) 0.409765284 0.830212861 0.225301769 1.225378884

TM vs MM (Cov & Var) 0.4147496 0.821357028 0.229047907 1.215418067

CC vs MM (Cov) 0.118308574 -1.585015844 0.230601333 -1.211322466

CC vs MM (Cov & Var) 0.116347706 -1.593696603 0.224062637 -1.228700353

MM (Cov) vs MM (Cov & Var) 0.329153769 -0.983958666 0.295913149 -1.054588492

Paired t-tests analysis

For t-tests of monthly returns (quarterly rebalanced), we observe similar results. All the p-value of all possible paired tests

result in failure to reject the null hypothesis at a significance level of 95%. Thus, there is no significant difference between the
mean returns produced from the different covariance estimation methods.

For the portfolios that allow short selling, the Traditional Method is selected as the best method since the portfolio has the
highest average p-value (33.378%) and positive t-stat value for the t-tests.

For the portfolios with no short sell, the Market Model (Covariance) has the highest likelihood to be the best method since the
portfolio has the highest average p-value (25.061%) for the t-tests. However, Market Model (Covariance) again does have a
negative t-stat value as compared to Traditional Method which returns a positive t-stat value.
Comparison of optimal portfolio
against benchmark
Results of t-test on the monthly GMV returns against benchmark (Monthly rebalanced)

Optimal Portfolio Benchmark P-value T-stat

Allow Short Sell Traditional Method S&P500 0.13993906 -1.496172878

No Short Sell Market Model (Covariance) S&P500 0.11797664 -1.586477131

For t-tests of GMV portfolios (monthly rebalanced) against S&P500, the p-value of paired t-tests result in failure to reject the

null hypothesis at a significance level of 95%. Hence, there is no significant difference between the mean returns produced
from the GMV portfolio and benchmark.
However, the negative t-stat values indicate that the chosen GMV portfolios have underperformed the S&P500 benchmark.
Comparison of optimal portfolio
against benchmark
Results of t-test on the monthly GMV returns against benchmark (Quarterly rebalanced)

Optimal Portfolio Benchmark P-value T-stat

Allow Short Sell Traditional Method S&P500 0.161922553 -1.416379913

No Short Sell Market Model (Covariance) S&P500 0.120850843 -1.573931841

Similarly for t-tests of GMV portfolios (quarterly rebalanced) against S&P500, the p-value of paired t-tests result in failure to

reject the null hypothesis at a significance level of 95%. Hence, there is no significant difference between the mean returns
produced from the GMV portfolio and benchmark.
However, the negative t-stat values indicate that the chosen GMV portfolios have also underperformed the S&P500

benchmark.
Comparison of GMV
portfolios against benchmark

Traditional Method, with No

Short Selling and Rebalanced on
Quarterly basis, seems to have
the best return to risk ratio out of
all the portfolios.
However, the return to risk ratio is
still lower compared to S&P 500.
In paired t-test, the p-value is the
highest at 30.57%, but t-stat is
negative at -1.03.
Analysis of component
weights - TM
Analysis of component
weights - CC
Analysis of component
weights - MM (Cov)
Analysis of component
weights - MM (Cov & Var)
Analysis of changes in
component weights

Overall, we observe that Traditional Method has the largest variance in component weights.
For Traditional Method with short selling allowed, the highest % for short selling reached around -35% for
stock BXP.
For the other methods, the highest % for short selling was less than -10%.
Analysis of covariance
estimation methods

Portfolio performance
We observe that portfolios with no short selling tend to
outperform portfolios that allow short selling.
Portfolio rebalancing
Portfolios which allow short selling seem to have greater
average portfolio turnover as compared to portfolios
with no short selling. The greatest average turnover
comes from the Traditional Method portfolio (with short
selling and monthly rebalanced).
Traditional Method portfolios also has significantly
higher turnover compared to the other methods,
Conclusion

Based on t-test of monthly returns, we determine that Traditional Method has the best performance out
of all the methods, although it causes the highest turnover as well.
We also determine that portfolios that do not allow short selling outperform portfolios that allow short
selling.
Finally, we concluded that the most optimal portfolio would be Traditional Method with no short selling
and quarterly rebalanced for the 10 stocks. However, in benchmark comparison, our most optimal GMV
portfolio of high dividend yield stocks is unable to beat the market portfolio.