In this assignment, follow the steps below and construct a market neutral portfolio with pair trading strategy.

1. Pick four stocks in the same industry you are interested in to analyze. State in your report what industry (with the NAICS or SIC code) you pick.

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Currently in practice there are several industry classification systems. Two most widely adopted systems are SIC (Standard Industrial Classification) and NAICS (North American Industrial Classification System. Each system identifies a firm’s primary business activity. Use either SIC or NAICS to identify an industry – it can be a major industry or a subclassification of the specialization.

For example, you can define your industry as a major industry – Retail Trade (NAICS codes 44-45) and pick the four retailers to analyze. Or you can define your industry as a subclassification – Pharmacies and Drug Stores (NAICS code 446110) and pick the four pharmacies and drug stores to analyze.

You can search for your industry and companies here As this search gives you only the top companies in a specific sector, if you are not sure about the NAICS or SIC code of the companies you are interested in, feel free to use other information sources such as Google and to look up the code.

2. Select a reasonable historical period you would like to analyze (i.e. past 6 months, past 12 months, past 18 months, etc). Collect historical price data from Yahoo! Finance for each stock, for market portfolio, and for risk-free asset. Apply the CAPM regression analysis and get each stock’s historical beta and alpha in Excel.

3. In Excel, based on what you get from Step 2, construct a market neutral portfolio with every two of the four stocks you pick (pair trading), with Solver add-in.

4. Among all the possible market neutral portfolios you get from Step 3, select the best one you would go with.

5. Write a brief report in a Word file. Briefly describe and explain what you do in the previous steps, and how you would allocate your wealth to construct a successful market neutral portfolio with pair trading strategy if you have a total of $30,000 to invest.

6. Submit both Excel file (with your detailed modeling) andWord file (with your report) through Canvas by deadline.

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