Connect Problems from your textbook, Investments, by Bodie, Kane and Marcus, 9rd. edition, McGraw-Hill Irwin. :
Details of these assignments can be found on the Course Outline and on the Syllabus (Assignments). You can go to http://connect.mcgraw-hill.com/class/p_viswanath_73178 to access the Connect website.
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Blackboard Discussion Boards
- The Chinese Financial System
- The Behavior of Financial Asset Prices
Excel Assignments: (You have to do these in Excel -- not in Word!)
- Problems 9 and 12, Chapter 3
- Problem 24, Chapter 12
Problem for October 11 (From Fall 1998)
You have available to you, two mutual funds, whose returns have a correlation of 0.2. Here is some information on their return probability distributions:
In addition, you can also invest in a riskfree 1-year T-bill yielding 12%.
- If you have a risk aversion coefficient of 4, and you have a total of $20,000 to invest, how much should you invest in each of the three investment vehicles? (10 points)
- What is the standard deviation of your optimal portfolio? (10 points)
- If you wanted an expected return of 50% with as low a portfolio variance as possible, what would you invest in each of the three investment vehicles? Assume for the sake of this question that you cannot borrow at the riskfree rate. (10 points)
Financial Markets and Institutions
As explained in the slides, financial functions can be broadly divided into six categories:
- To transfer economic resources across time, borders and among industries
- To provide ways of managing risk
- To provide ways of clearing and settling payments to facilitate trade
- To provide a mechanism for the pooling of resources and for the subdividing of ownership in various enterprises
- To provide price information to help coordinate decentralized decision making in various sectors of the economy
- To provide ways of dealing with the incentive problems created when one party to a transaction has information that the other party does not or when one party acts as an agent for another
Give the name of a specific financial intermediary (e.g. Bank of America or JP Morgan Chase or Visa or FICO (formerly Fair Isaac Corporation)) for each of the first five functions and write two or three sentences about each one, showing how it performs each of the functions.
The Mortgage Crisis
Write a paragraph explaining the reasons why the 2008 mortgage crisis occurred. Try to make it as specific as possible.
Stock Valuation Project
Collect stock returns for a stock of your choice. For example, if you choose ANF ( Abercrombie & Fitch Co.), you can go to http://finance.yahoo.com/q/hp?s=ANF+Historical+Prices to get ANF stock prices; you will then need to convert these into returns. You can also get these data from Bloomberg or from Zacks. Go to http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html and download data on the Fama-French factors. Merge the two data sets. (If you want the matched data for ANF, you can find them here; if you want the matched data for NCR Corp. (NCR), you can find them here.)
- Use this information to compute the required rate of return on your stock of choice, using data for the five most recent years.
- Use the CAPM model, then use the Fama-French Carhart model.
- Redo the exercise using data for the five years prior to that.
- Are there any changes in the results?
- Look at the description of the firm and news items about the firm. Are the risk measures (the beta coefficients) different? Are they significantly different? How have they changed? Can you explain why they might have changed, using information about the nature of your firm, as well as the explanations in the book and in the slides for the risk measures. If you were computing the required rate of return on your firm to use in investment decisions, would you use five years data or ten years data?
- Look at the correlogram (autocorrelation at different lags) of returns for your stock. Can you see patterns? Why are there or are there not patterns?
Read this article for a broad overview of CAPM versus the 3-factor model; this article is much more useful for this assignment, but read it after you read the first one.
Your answers should be submitted in a Word file, with a single Excel file containing your computations. Make sure that you use Excel formulae in the spreadsheets, so I can see where you got your answers from. Do not copy and paste values alone from your computations.
Grading -- 10 points for execution, 5 points for expected return computation, 5 points for correlation analysis, 10 points for beta change analysis.
Rubrics for grading:
- Using excel formulas to show how numbers were calculated.
- Recognizing that beta estimates are -- estimates, and as such have standard errors. In order for a difference between two estimates to be a relevant difference, it needs to be statistically significant, as well as economically significant.
- Understands what risk premia are and how to estimate risk premia (for example, recognizing that risk premia have to be positive).
- Explaining change in beta coefficients in terms of changes in the tactics, strategies and circumstances of the firm.
The Value of Stock Markets: Group Project
Read Muhammad Yunus, "Building Social Business" and evaluate the possiblity of a "Social Stock Market" as described on p. 168. How do you think such a stock market might work? (Materials available on Blackboard, Course Documents)
What is the purpose of a regular stock exchange like the NYSE or the DAX? What is the purpose of the Social Stock Market (SSM)? Is it different? What do you buy when you buy a share of stock in a regular stock exchange? Is this different in a SSM? An SSM is more than a social network forum where people vote as to how nice an idea is. How would valuation work? What about voting rights? Why would somebody sell? Why would somebody buy?