Now that you have selected a market/asset class; updated the monthly index values for 2016 as well as verified and corrected (if necessary) the historical data on your market’s index
(Assignment 1); learned and shared knowledge of the index designed to track your market/asset class (Assignment 2) the next steps are to start the analysis, assessment and evaluation of the market/asset class itself
Measuring your market/asset class’s performance over the lengthy history of the data base is a critical first step in the analysis.
With a few exceptions, the statistical measures we will be using are ones you have learned and used in classes such as Math 152, Fin 319, and Bus 311. They are all easily computed via the Excel Statistic
Formula Function.
However, great care must be taken to ensure you are properly computing the measures of performance. This is not a mechanical exercise! Attention to detail is critically important.
In particular, compute the following measures of return and risk for your market/asset class. The Excel spreadsheet entitled Return and Risk Example should be most helpful here.
I.Return Measures:
1.First, calculate monthly returns for January, 1996 – December, 2018 (23 years, 296 months).
2. Second, calculate monthly average returns (arithmetic and geometric mean returns) for 1996 – 2018.
3.Third, calculate annual returns for 1996 – 2018.
4.Calculate average returns (arithmetic and geometric means for the annual returns).
5.Compound Growth Rate. If $1,000 was invested in your market on December 31, 1995
what would have been its value on December 31, 2018? Show its value for every month
from January, 1996 through December, 2018.
6.Line graphs of monthly returns, annual returns, and item 5 above.
7.Histogram of monthly returns.
2 II.Risk Measures: Standard Risk Measures.
Calculate for monthly and annual time period frequencies. Easily done via Excel Statistic Formula Functions.
1. Maximum and minimum returns.
2. Range of returns (sum of absolute values of maximum and minimum returns).
3. Mean absolute deviation.
4. Variance of returns.
5. Standard deviation of returns.
III. Risk Measures: Lower Partial Moments/Downside Risk Measures.
Use Excel commands to develop formula from Class Discussions and Chapter 5
1. Semi-Variance.
2. Semi-Standard Deviation.
IV.Distribution Measures:
Use Excel commands.
1. Skewness.
2. Kurtosis.
V. Overall Return –Risk Measures:
Calculate after class discussion.
1. Sharpe Ratio.
2. Sortino Ratio
Present the data as follows:
(1) Excel spreadsheet for monthly returns.
(2) Separate Excel spreadsheet for annual returns.
(3) Separate Graphs per items I5 and I6. Three line graphs per I5 above with time on the abscissa and monthly return on the ordinate, plus a separate histogram of monthly returns per I6. One graph per sheet/page.
(4) Excel spreadsheet showing formula and data for items II, III, IV, V.
(5) Summary table showing: (a) monthly measures of arithmetic and geometric
returns, risks, downside risks, distribution measures, overall return/risk measures; (b) annual measures of same statistics as monthly ones above. See Table below.
After calculating the above measures and plotting the graphs discuss the
characteristics of your market; be prepared to discuss them with your
classmates; and be prepared to submit your data in a format that allows for it to
be part of a class data base on comparative returns and risks across the various
asset classes.
What do the data and graphs tell you about your market? This is an intentionally
open-ended question.
The only directed question is whether or not you consider the returns in your
market to be normally distributed? Why is this question important?
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