ProblemSet1 Solutions v1 Essay - 1519 Words

Econ 136: Financial Economics Problem Set #1 Due Date: September 11, 2014 1. The return profile and risk of the SP 500. In this exercise you will reproduce the graphs presented in class. The goal of this exercise is (i) to expand your datahandling skills, (ii) test your understanding of basic probability concepts using real data and (iii) develop an appreciation for the use of replicating a result to ensure that you understand it. Go to Yahoo Finance (finance.yahoo.com) and search for the ticker symbol SPY. On the left-hand side of the page you will see a link to â€Å"Historical Prices†. Click on the link to get to the Historical Prices page and download the daily prices from 01/29/1993 to 08/28/2014. You will find a â€Å"Download to Spreadsheet†Ã¢â‚¬ ¦show more content†¦4 2. The return profile and risk of the iShares 20+ Year Treasury Bond ETF (TLT). In this exercise you will generate the graphs presented in class for a bond index. You will use the infrastructure you developed above in problem (1) for this exercise: the only difference is the data. Each part of the exercise is a repeat of what we did above with the SPY data. Go to Yahoo Finance (finance.yahoo.com) and search for the ticker symbol TLT. On the left-hand side of the page you will see a link to â€Å"Historical Prices†. Click on the link to get to the Historical Prices page and download the daily prices from 07/30/2002 to 09/02/2014. Also download the dividends for this period (the dividends are in a separate file). (a) Create a graph of the Close price of TLT as a function of time. Label the axes and give it a title (e.g. TLT). This is simply a graph using the data you have downloaded. 140 CLOSING PRICE (USD) 130 120 110 100 90 80 02 04 06 08 10 12 14 16 TIME (year) Figure 5: No Excel functions beyond graphics functions were used to make this graph. 5 (b) Create a graph of the TLT returns as a function of time using the Close price and dividends. To calculate the return we use the equation from the lecture slides x(t + Ï„ ) − x(t) + income − costs x(t) which for our problem becomes x(t + Ï„ ) − x(t) + dividend during period r(t) = x(t) r(t) = Now while this equation is intuitive for the returns over a