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Unformatted text preview: 0)^(1/4)!! 0.004 Thus, IBM stock holder earns 0.4% of daily Thus, return on average from 1/10 to 1/14 return 5-8 Mean, variance, and standard deviation in Excel Mean: Use “AVERAGE” function Variance: Use “VAR” function Standard deviation: Use “STDEV” function Exercise 1: Compute the mean, st. dev., and variance of daily Compute returns on Dell from Jan. 4th through Jan. 8th returns 5-9 Indexes, risk-free rate, risk premium, and Sharpe ratio 5-10 Indices Indices can be regarded as “the price of a Indices basket of stocks” basket Three major indices: - Dow Jones Industrial Average (30 industrial giants – what are they?) giants - S&P 500 Index (500 important stocks – what are they?) they?) - NASDAQ Composite Index (All stocks listed in NASDAQ exchange) NASDAQ - See Yahoo!Finance for components 5-11 The definition of simple index returns From period t to t+1: Index (close) at t+1 - Index (close) at t Index Simple return = ------------------------------------------------Simple Index (close) at t Index Try to download the monthly data of Dow Jones Industrial Try Average Index and NASDAQ Composite Index in 1990Average 2010 from Yahoo!Finance “IndexData” Tab in “Lecture2_StockPricing” Try to plot the index level and index return of S&P 500 in Try 1990-2010 5-12 The Dow Jones and NASDAQ indices 16000 5000 14000 4000 12000 3000 10000 8000 2000 6000 1000 4000 2000 95 96 97 98 99 00 01 02 03 04 05 06 07 08 DJIA 0 NASDAQ 5-13 Rate of returns of Dow Jones and NASDAQ indices – See something? 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 95 96 97 98 99 00 01 02 03 04 05 06 07 08 DJIA_RET NASDAQ_RET 5-14 Risk-free rate - What’s the safest investment? 1. Bonds are safer than stocks 2. Government bonds are safer than corporate 2. bonds bonds 3. Federal (central) government bonds are safer than 3. state/city (local) government (discuss why?) (discuss 4. Short-terms are safer than long-terms 4. http://finance.yahoo.com/bonds/composite_bond_rates http://finance.yah...
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