Econ 136: Financial Economics

Problem Set #1
Due Date: September 10th, 2015
Please write down the main functions (Excel or other) used.
Please submit the homework before the class starts.
Late homework will not be accepted.
Please put your name, student ID & your GSIs name at the up right corner of the
front page.
Please staple the pages of your homework together.
Homework will be returned in Discussion Section.
1. The return profile and risk of the S&P 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 Historical Prices. Click on the
link to get to the Historical Prices page and download the daily prices from 01/29/1993
to 08/25/2015. You will find a Download to Spreadsheet link at the bottom of the
page. Also download the dividends for this period (the dividends are in a separate
file).
(a) Create a graph of the Close price of SPY (not the adjusted close price)
as a function of time. Label the axes and give it a title (e.g. SPY). This is
simply a graph using the data you have downloaded.
(b) Create a graph of the SPY returns as a function of time using the
Close price and dividends. Begin by adding a dividends column to assign
dividends for each date: VLOOKUP() may be helpful here. For dates with no
dividends, a #N/A will likely appear. You can eliminate the #N/A with the
IF() and ISNA() functions. In the next column calculate the returns including
the dividends. Graph these results. Label the graph.
(c) Create a semi-log graph of the cumulative distribution function (CDF
and 1 - CDF) of the SPY returns. Copy the values return data to the next
column using the Copy & Paste Special commands so that on the return
values are copied. Order the returns using the Sort command. In the column
to the right of the ordered returns calculate the CDF using CDF(xk ) = (Nk+1)
where k is the running index of the return k = 1 . . . N and N is the number of
returns. The COUNT() function is useful for calculating k. In the column to the
right of your CDF results, use the IF() statement to create a column of CFD and
1-CDF depending on whether the return is negative. Graph these results with a
linear x-axis and a logarithmic y-axis. Label the graph.
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(d) Add a Gaussian distribution to the semi-log graph of the CDF of the
SPY returns. Begin by calculating the mean AVERAGE() and standard deviation SQRT(VAR()) of the ordered returns. Highlight these in your homework
so your GSI can see them. Use them to calculate the cumulative Gaussian distribution (NORMDIST() and 1 - NORMDIST()) in the column next to your last
cumulative distribution calculation. Make a copy of the graph from the part (1c)
above and add the cumulative Gaussian distribution to the copy.
2. The return profile and risk of the iShares MSCI BRIC ETF (BKF). In this
exercise you will generate the graphs presented in class for the iShares MSCI BRIC
ETF which tracks the investment results of an index composed of Chinese equities
that are available to international investors, as well as Brazilian, Russian, and Indian
equities; the BRICs. 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 BKF. On
the left-hand side of the page you will see a link to Historical Prices. Click on the
link to get to the Historical Prices page and download the daily prices from 11/20/2007
to 09/01/2015. Also download the dividends for this period (the dividends are in a
separate file).
(a) Create a graph of the Close price of BKF as a function of time. Label
the axes and give it a title (e.g. BKF). This is simply a graph using the data you
have downloaded.
(b) Create a graph of the BKF returns as a function of time using the
Close price and dividends.
(c) Create a semi-log graph of the cumulative distribution function (CDF
and 1 - CDF) of the BKF returns.
(d) Add a Gaussian distribution to the semi-log graph of the cumulative
distribution function (CDF and 1 - CDF) of the BKF returns
3. Risk Analysis:
(a) Compare the cumulative distribution functions shown in the graphs generated
above in items (1c) and (2c). State which index is riskier and explain why.
(b) Compare the Gaussian approximation of the SPY and BKF data.
i. Is the Gaussian a reasonable representation of the SPY or BKF data in (i)
the center of the distribution and (ii) the tails of the distribution?
ii. Roughly how much more probable is a return of -10% or worse (more negative)
for the BKF ETF than for the SPY ETF. (Use the CDF values that are closest
to -10% for your comparison.)
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4. Given the expression for P (|return| > x) on slide 24 of lecture 2 and the discussion in
Section 6 of the Gabaix reading, derive the expression of, and value for, the slope of
the blue line on slide 24 of lecture 2.