ASSIGNMENT 1

Total points: 100pt

Deadline: 11h59PM, Saturday, May 2nd 2020
Don’t submit your assignment late. (-10pt for each one hour late)

Question 1 (10pt): Your portfolio includes 200 shares of APL and 300 shares of MSFT, which you
just bought at $30 and $50 per share, respectively.
a. What fraction of your portfolio is invested in APL? In MSFT?
b. If MSFT increases to $60 and APL decreases to $20, what is the return on your portfolio?
c. If inflation rate is 3%. What is real return of this portfolio?
Solution:
a/ - APL: buy 200 shares at a price of $30
MSFT: buy 300 shares at a price of $50
Original investment = 200*30 + 300*50 = 21000
200∗30
Fraction invested in APL: WAPL = * 100% = 28.75%
200∗30+300∗50
300∗50
Fraction invested in MSFT: WMSFT = * 100% = 71.43%
200∗30+300∗50
b/ New value:
APL: buy 200 shares at a price of $20
MSFT: buy 300 shares at a price of $60
Ending total value = 200*20 + 300*60 = 22000
=> R= (22000 – 21000)/21000 = 0.0476 or 4.76%
c/ Real return of this portfolio is:
1+ R 1+ 4.76 %
Rreal = -1= -1=1.0170 -1 = 0.0170 or 1.70 %
1+ Infl ation rate 1+3 %

Question 2 (10pt) : There is information about prices and dividends of stock A. All prices are after
the dividend has been paid. If you bought the stock on January 1 and sold it on December 31, what is
your realized return? (Compounding investment)

Date Price Dividend

January 1 P0=25
March 31 P1=28 D1=1.2

June 30 P2=30 D2=1.2

Sep 30 P3=27 D3=1.2

Dec 31 P4=32 D4=1.2

- The realized return for January 1 to March 31 is:
 D1+(P1−P0 )
R1= = [ 1.2+ ( 28−25 ) ] / 25= 0.168
P0
- The realized return for March 31 to June 30 is:
D 2+(P2−P1 )
R2= = [ 1.2+ ( 30−28 ) ] /28= 0.114
P1
- The realized return for June 30 to Sep 30 is:
D 3+( P3−P2 )
R3 = = [ 1.2+ ( 27−30 ) ] /30= -0.06
P2
- The realized return for Sep 30 to Dec 31 is:
D 4 +( P 4−P3 )
R4 = = [ 1.2+ ( 3 2−27 ) ] /27 = 0.230
P3
=> Compound realized return is:
R=(1+ R1)*(1+ R2)*(1+ R3)*(1+ R4 ) -1
=(1+0.168)*(1+0.114)*(1-0.06)*(1+0.230) -1 = 0.5044 or 50.44%

Question 3 (15pt): The last five years of return for stock are:

Year 2015 2016 2017 2018 2019

Return -20% 10% 50% 30% 25%

1. What is the average return of stock in two methods (Arithmetic mean return and geometric
mean return)
2. What is the variance, standard deviation of stock return
3. If we use arithmetic mean return of period 2015 - 2019 to forecast about the return of 2020.
What is 95% confidence interval for 2020’s return? (Using normal distribution)

1. Arithmetic mean return:

R 2015 + R2016 + R 2017 + R2018 + R 2019 −20 %+10 % +50 %+ 30 %+25 %
R AM = = = 19%
5 5
Geometric mean return:
5
RGM = √ (1+ R2015 )(1+ R 2016 )(1+ R 2017 )(1+ R2018 )(1+ R2019 ) - 1
= √5 (1−20 %)(1+10 %)(1+50 %)(1+30 % )( 1+ 25 %) - 1
= 16,49%

2. Variance:
1
σ2 = x ¿ + ( R2016 −R)2+ ( R2017 −R)2 +( R2018 −R)2 + ( R2019 −R)2]
n−1
1
= x [(−20 %−19 %)2 +(10 %−19 %)2 + (50 %−19 %)2 +(30 %−19 %)2+ (25 %−19 %)2]
5−1
= 0.068
Standard deviation
σ = √ σ 2 = √ 0.068 = 0.2608
3.
SD( R) SD(R)
Confidence interval = (E(R) - z ex ; E(R) + z ex )
√n √n
95% confidence interval = 19% +/- 1.96*26.08%.
The confidence interval is -32.11% to 70.11%. This means with 95% confidence, the 2020 returns
will range from -32.11% to 70.11%.

Question 4 (10pt): VN Index is currently at 900 points. There are 4 possible outcomes of VN index
after 1 year:

Scenario Return VN index Number of experts Probability

forecast

#1 0.11 1000 50 0.5

#2 0.06 950 10 0.1

#3 -0.09 820 30 0.3

#4 0.22 1100 10 0.1

1. What is expected return of VN Index after 1 year?

4
E(R) = ∑ ( Ri∗Pi)= 0.11*0.5+0.06*0.1+(-0.09)*0.3+0.22*0.1
i=1

= 0.056

2. What is variance, standard deviation of VnIndex return?

Variance of VnIndex:
4
2
σ 2=∑ { Pi∗[ Ri− E( R)] }
i=1

= 0.5(0.11−0.056)2 + 0.1(0.06−0.056)2 + 0.3(−0.09−0.056)2 + 0.1(0.22−0.056)2

= 0.010544

Standard deviation of VnIndex:

σ= √ σ 2 =√ 0.010544 = 0.1027
Question 5 (15pt): Investor forecasts about return of stock A. There are 4 possible outcomes with
future return of A.
Scenario Return of stock A Probability
#1 10% 0.3

#2 -20% 0.4
#3 25% 0.2

#4 35% 0.1
1. What is expected return of stock A?
2. What is variance, standard deviation of stock A?
3. What is coefficient of variation of stock A?

1. What is expected return of stock A?

E(RA) = R1*P1 + R2*P2 + R3*P3 + R4*P4
= 10%*0.3 + (-20%)*0.4 + 25%*0.2 + 35%*0.1
= 0.035
2. What is variance, standard deviation of stock A?
Variance of stock A:
4
2 2
σ =∑ { Pi∗[ Ri− E(R)] }
i=1

= 0.3*(10 %−0.035)2+ 0.4*(−20 %−0.035)2+0.2*(25 %−0.035)2+0.1*(35 %−0.035)2

= 0.042525
Standarđ deviation of stock A:
σ= √(σ 2 ¿=√ 0.042525= 0.2062
3. What is coefficient of variation of stock A?
σ 0.2062
CV = = = 5.8914
E( RA) 0.035

Question 6: (40pt) Excel applications

6.1 (20pt) Everyone has their own stock, your stock in this link:
https://www.slickcharts.com/sp500
For example, your order in class list is 9, your stock would be Procter & Gamble Company, stock
ticker: PG
Then you search this stock ticker “PG” using finance.yahoo.com to collect historical price of your
stock in 1 year (Jan 1 to Dec 31). You can choose any year. Then, using excel to calculate:
a. Daily return, weekly return, monthly return of your stock
b. Arithmetic mean return of each case
c. Variance, standard deviation of each case.
d. Explain the meaning of arithmetic mean return, standard deviation of your stock in each case
6.2. (20pt)
a. Collect the daily historical data for 6 - year period from Jan 1st, 2014 - Dec 31, 2019 of
following assets: Your stock, Bitcoin price (Bitcoin USD), GLD - SPDR Gold Shares .
b. Draw histogram chart of each asset during this period
c. Calculate the arithmetic mean return, standard deviation of each asset
d. Compare risk, return of each asset. Does this result follow your intuition about level of risk of
each asset.