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Exercise

Momentum factor

In this exercise, you are going to investigate the correlation of the S&P500 returns with 2 factors, momentum and value.

A stock is showing "momentum" if its prior 12-month average of returns is positive. The momentum factor is therefore formed by combining stocks that show consistent positive historic returns. The value factor looks at stocks that are inexpensive relative to some measure of fundamental value. For example price-to-earnings and price-to-book are typically ratios to measure "value". Let's see how our S&P500 returns relate to the returns of these factors.

Available is a DataFrame df containing the returns of the two factors and the S&P500 over time.

Instructions 1/4
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  • Create a new column in df containing the 20-day rolling correlation between the S&P500 returns and the momentum factor, let's call it correlation_mom.