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### 09_tels

Course: ECON 157, Spring 2008
School: Duke
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157 Economics Tauchen Notes on Telser's Criterion Fall 1999 Telser's criterion is to maximize subject to p = Erp ; Prrp rL ; where rp is the portfolio return, is a small number, e.g., = 0:05 and rL is some predetermined lower limit. If returns are normally distributed then Prrp rL = Pr rp , rL p , p = rL , p : p p p If = 0:05; then to ensure the constraint Prrp rL = 0:05 is satis ed, we must have rL ,...

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157 Economics Tauchen Notes on Telser's Criterion Fall 1999 Telser's criterion is to maximize subject to p = Erp ; Prrp rL ; where rp is the portfolio return, is a small number, e.g., = 0:05 and rL is some predetermined lower limit. If returns are normally distributed then Prrp rL = Pr rp , rL p , p = rL , p : p p p If = 0:05; then to ensure the constraint Prrp rL = 0:05 is satis ed, we must have rL , p p ,1:65: 1 Another way to write the constraint 1 is p ...

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Duke - ECON - 157
Economics 157 TauchenFall 1999Suppose the returns generating process isriFirst Look at APT= i + biF +rpi;i= 1; 2; : : : ; Ni;2where EF = 0; VarF = is whereF;2E i = 0; Var i =CovF; i = 0: The portfolio returnPN p=i=1 w
Duke - ECON - 157
Economics 157 TauchenFall 1999The APTThe Returns Process:For simplicity, we use a J = 2 factor model for the returns generating process: ri = i + bi1 F1 + bi2 F2 + i ; i = 1; 2; : : : ; N 1 where F1 and F2 are two common random risk factors s
Duke - ECON - 157
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Economics 157 Tauchen The recent history of U.S. data is shown below:20 15 10 5 0 1960 20 15 10 5 0 1960 20 15 10 5 0 1960 1965 1970 1975 1980 1985 1990 1965 1970 1975 1980 1985 US 10Year Rate 1990 1965 1970 1975 1980 1985 US 1Year Rate 1990Fall 1
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Economics 157 TauchenFall 1999Fixed Income and DurationT T TValuationTConsider a portfolio of bonds with cash ows G1; G2; : : : :; G ; in periods j = 1; 2; : : : ; J: The value of the portfolio is X G V0 =J JLet denote the price of a pu
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Economics 157 TauchenFall 1999We want to derive the relationship between asset prices and payouts. Let Y denote the random payout of an asset with mean EY and variance Var Y. Think of Y as the total pro t one period hence of a particular investm
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#J# #R# #r#Bais.docWDBNIC# M MKm# ## # #Y #
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Duke - ECON - 157
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Duke - ECON - 157
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Duke - ECON - 157
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