J hawkins econ 136 financial economics 3 20 returns

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Unformatted text preview: 3/ 20 Returns Consider the following data for Microsoft: Price (08/25/08) USD 27.66 Dividend USD 0.52 Price (08/25/09) USD 24.64 The return is x (t + τ ) − x (t ) + income − costs x (t ) 24.64 − 27.66 + 0.52 = 27.66 −3.02 + 0.52 = 27.66 = −0.09 = −9% r (t ) = Probability, Returns & Risk: R. J. Hawkins Econ 136: Financial Economics 12/ 20 SPY Cumulative Return Distribution More Data 100 CDF(-x), 1-CDF(x) 10 -1 10 Gaussian -2 10-3 10-4 10-5 0 5 10 15 RETURN (%) Probability, Returns & Risk: R. J. Hawkins Econ 136: Financial Economics 18/ 20 Covered Interest Parity & Keynes “If by lending dollars in New York for one month the lender could earn interest at the rate of 51/2% per annum, whereas by lending sterling in London for one month he could only earn interest at the rate of 4%, then the preference observed above for holding funds in New York rather than in London is wholly explained. That is to say, forward quotations for the purchase of the currency of the dearer money market tend to be cheaper than spot quotations by a percentage per month equal to the excess of the interest which can be earned in a month in the dearer market over what can be earned in the cheaper.” – J. M. Keynes, A Tract on M...
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This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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