Maths

Homework Assignments for Lecture 5

1

The Excel file, ConsumerDiscretionaryEntertainment.xls, contains monthly return data (presented as percent returns) for the following eleven (11) major consumer discretionary entertainment companies between the years 1995 to 2004. Identifier Company.Name DIS DISNEY (WALT) CO ISCA INTL SPEEDWAY CORP -CL A MGM METRO GOLDWYN MAYER INC PIXR PIXAR VIA.B VIACOM INC -CL B DISH ECHOSTAR COMMUN CORP – CLA L LIBERTY MEDIA CORP – SER A CZR CAESARS ENTERTAINMENT INC. BYD BOYD GAMING CORP HET HARRAHS ENTERTAINMENT INC MGG MGM MIRAGE

Your analysis will be for the five year time period January 2000 to December 2004. The month returns for the Russell 3000 Index and the risk free asset are also given in the same workbook. Problem 5.1 This problem is concerned with the modeling of transaction costs for trading portfolios in the above companies. Assume that trading is to be done on December 31, 2004. You will need to get year end prices and shares outstanding. Google Finance provides a tool for getting historical prices. You can then use current market capitalization to get shares outstanding. The working paper by Prof. Damodaran at NYU has been posted in the Assignments section. The title of the paper is Asset Selection Strategies and Evidence. Table 12.3 provides a model of round-trip transactions cost as a function of the dollar block traded in $ thousands and capitalization sector which is defined in Table 12.1. To estimate the one-way cost, divide the round-trip cost by 2. Using these data construct a cost estimate for each of the stocks listed above. Problem 5.2 Using the covariance matrix and average return estimates from Problem 2.9, develop an efficient frontier incorporating your transactions cost model from Problem 5.1 into the analysis. Problem 5.3 Simulate a portfolio using the market capitalizations as weights for the January 2000 to December 2004 time period. Given the portfolio returns and the average risk-free returns, estimate the Sharpe ratio of this portfolio.

Homework Assignments for Lecture 5

2

Problem 5.4 Using the market capitalization you obtained for Problem 5.1, perform a Black Litterman implied views analysis to transform market capitalizations into expected excess return forecasts. Use the Sharpe ratio from Problem 5.3 Problem 5.5 You are given the following estimates of expected returns and standard deviations for two securities. Expected Return Standard Deviation Security 1 10% 5% Security 2 4% 2% For the two securities, plot all combinations of the securities in ,P Pr σ space. Assume for correlation coefficients 1, 0.5, 0, 0.5,1ρ = − − . For each correlation coefficient what is the combination that yields the minimum risk pσ . Specify the weights, expected return and risk. Assume no short selling?

problemSet02/ConsumerDiscretionaryEntertainment.xls