Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
Empirical Finance Spring
1.(10pts) The Carey company paid Dt = 1 of dividends this year. If its dividends are expected to grow at G = 1.03 per year,
Please double check your answers.
Q1. (40pts) Gordon growth model
-
(10pts) The Carey company paid Dt= 1 of dividends this year. If its dividends are expected to grow at G = 1.03 per year, what is the dividends for the Carey company five years from now, that is, Dt+5?
-
(10pts) From our lecture slide, we can express price as
for some large k. The Gordon growth model assumes (i) Dt+1 = G × Dt and (ii)
Rt = R. Express
according to the Gordon growth model.
-
(10pts)The current price of Carey stock is $25 per If its current dividend is $1 per share and investors’ required rate of gross return is 1.1, what is the growth rate of dividends for Carey stock based on the Gordon growth model?
-
(10pts)A company with Dt = 1 and R = 1.2 grows at G = 1.06 for the first 5 years and drops to zero (meaning Gj = 1) thereafter (we use Gj to indicate its the new growth rate). What should its current price be according to the Gordon growth model?
Q2. (30pts) Portfolio choice
Suppose that the S&P 500 index has mean of E(rM ) = 0.16 and standard deviation of
σ(rM ) = 0.10. The risk-free rate is rf = 0.08.
-
(10pts)What is the expected return and standard deviation of a portfolio that is totally invested in the risk-free rate?
-
(10pts) What is the expected return and standard deviation of a portfolio that has weight ω = 0.5 on the risk-free rate and 1 − ω = 0.5 in the S&P 500index?
-
(10pts) What are the weights on a portfolio, ω for investing in the risk-free rateand 1 − ω for investing in the S&P 500 index, that produce a standard deviation that is 0.04? What is the expected return on that portfolio?
Q3. (20pts) Read Fama and French (2004) carefully and summarize the paper in one page (at least four paragraphs).
Q4. (80pts) Portfolio choice (coding exercise)
Download “stocks.xlsx.” You will find 3 stock prices (labeled “market, A, B”) and 3 factors (labeled “riskfree, smb, hml”) in the range of 2011:M12 to 2021:M2.
-
(20pts) Let the log return for stock i be ri,tat time t. Provide the sample mean and standard deviation for rM,t, rA,t, rB,t where 2012:M1 ≤ t ≤ 2021:M2. For convenience, “M” refers to “market.”
-
(20pts) Estimate the CAPM equation and report the estimated β and R2from the regression. Here the estimation sample ranges from 2012:M1 to 2021:M2. Note that you are estimating the CAPM equation for A and B stocks separately (so, twice in total).
-
Similarly estimate the Fama-French 3 factor model for A and B stocks. Here the estimation sample ranges from 2012:M1 to2021:M2.
(a)(20pts) Compare the estimates of βwith those from the CAPM equation.
(b)(20pts)Based on the coefficient estimates for “smb” and “hml” factors, discuss the characteristics of A and B stocks.
Q5. (30pts) Investment
Suppose that the month t prices are PM = $3, 972.89, PA = $16.19, and PB = $521.66. You can spend up to $100,000 in stocks (M, A, B) after studying the historical price/return series (2012:M1-2021:M2). For this question, you may want to analyze their log return dynamics.
The minimum requirement is that you have to at least spend $10,000 on each stock. To helpyou understand the problem, suppose you buy 3 of M and 618 of A and 20 of B,
3 · PM = $11919
618 · PA = $10005
20 · PB = $10433
then the total cost of your portfolio is Pp = 3 · PM + 618 · PA + 20 · PB = $32357. Here, I am rounding up the decimal points for ease of illustration. Note that you can buy more asyou still have $67643 remaining. Now, suppose that the month t + 1 prices are PMj , PAj , and PBj , respectively. You are going to calculate the one-month holding period return of your portfolio
Ppj = 3 · PMj+ 618 · PAj+ 20 · PBj
where the holding period return is defined as
Explain how much you would buy each of M , A, and B. Your answer should be based on your analysis of HPR from the historical data. Thus, what only matters is HP R, that is, what’s your monthly return on investment, not about Pp or Ppj .
Note: I am asking you to use your imagination + data analysis skill you’ve learned so far in class.