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Ch 7 Practice - University of Toronto Department of...

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University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. 1 ECO 204 Chapter 7: Practice Problems & Solutions for Economics of Financial Portfolio Allocation in ECO 204 (this version 2012-2013) Department of Economics (STG), ECO 204, Sayed Ajaz Hussain _________________________________________________________________________________________________ P RACTICE P ROBLEMS W ITH S OLUTIONS TO : C HAPTER 7 : Economics of Financial Portfolio Allocation Updated: 1/13/2013 (7.1) For this question you’ll need to download data for a “risk free asset” and two “risky assets”: US 3 -month T-Bills and Dell and Boeing stocks. Here’s what you need to do to get data on US 3 -month T-Bills and Dell and Boeing stocks: Go to http://dc1.chass.utoronto.ca/ and then CRSP (if you’re off campus you’ll need to log in with your UTORid) Go to Advanced search Choose Monthly tables (this is because daily tables, by definition, do not contain dividend yields) S earch for Keywords “Dell Boeing” (string in company name, and match any keywords) Select Dell and Boeing and “copy to my companies list” In Select one or more companies ”Select all” and continue In “Monthly Tables” select: Lowest bid price, highest ask price, closing price, volume shares traded, Returns, and Returns without dividends In “Output format” select “MS Excel Ready” and continue The Excel spreadsheet will contain Boeing data from Sept 29 th 1934 onwards and Dell data from June 30 th 1988 onwards, both until December 31 st 2011. In a separate worksheet, download 3-month US T-bill daily interest rates from Federal Reserve St. Louis http://research.stlouisfed.org/fred2/series/TB3MS/downloaddata?cid=116 . Transform this data from percentages into “out of 100” decimal places Create a single worksheet with Boeing, Dell and T-Bill interest rates data from June 30 th 1988 onwards. Arrange individual stock data in the following order: Volume, High price, Low price and closing price. (a) Use Excel’s built in “stock chart tool” to plot Dell and Boeing’s Volume, High price, Low price and Closing price. (b) The return on an asset between time and is defined as: CRSP gives the “holding period return” (i.e. ) and “return without dividends” (i.e. capital gains). Calculate the Dell and Boeing’s dividend yield and dividends for all months in the sample. What do you notice about Dell’s dividends (Finance and accounting majors: read this article )?
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University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. 2 ECO 204 Chapter 7: Practice Problems & Solutions for Economics of Financial Portfolio Allocation in ECO 204 (this version 2012-2013) Case 1 Risk Free Asset Fraction (1 - β ) Risky Asset Fraction β (c) Calculate the Boeing and Dell’s mean return, risk, and covariance between Boeing and Dell retur ns for all months in the data set. Note that mean return is: Risk is standard deviation of returns: ( ̅) The covariance between asset A and asset B returns is: ( ̅)( ̅ ) July 29th 1988 - Dec 31st 2009 Dell Boeing Mean r 0.028 0.011 Risk σ 0.145 0.080 Cov(Dell, Boeing) 0.002 r f , Jan 1st 2012 0.0003
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