You would also like to evaluate the historical relationship between small-cap-oriented and large-cap-oriented stocks that form the basis for the SMB risk factor in the Fama-French multifactor model. The proxies you choose are the Russell 2000 index and the Russell 1000 index, respectively.
a. Under the "Indices" tab, download weekly price information for the most recent five- year period available for each index.
b. For each index, calculate the set of weekly returns that correspond to these weekly price series.
c. Calculate the average weekly return and the return standard deviation for each index series. Which equity investment style (i.e., small cap vs. large cap) appears to have been the most successful over this sample period?
d. Suppose that you are considering forming a hedge fund employing a strategy of always being long in small-cap stocks and short in large-cap stocks. Evaluate the potential suc- cess of this strategy by taking the difference in returns between the small-cap and large- cap indexes you analyzed above. What is the average return and return standard devia- tion for the return differential series?
e. Plot the return differential series you calculated in Part d, using the return differential on the vertical axis and time on the horizontal axis. What do you conclude about the viability of the "long small-cap, short large-cap" investment strategy?