3. The following table gives actual data on the U.S. CPI and the S&P; 500 total

Question

3. The following table gives actual data on the U.S. CPI and the S&P; 500 total return index (SPTR. A. (20) Use this data to compute the average annual nominal return and real return for two consecutive 1- year holding period returns of a stock portfolio that matches the S&P; 500 total return index. (for example you could compute 2011-12 and 2012-2013) Please use continuous compounding. Express your final answer in percentage. B. (10) Now compute the average annual real return to a 2-year holding -period portfolio of your two consecutive years. C. (10) You have a friend who has been studying the stock market for the last few years and is about to invest $10,000 in a highly diversified portfolio. After 10 years, your fiend expects to have over $66,000 in real dollars. You recall front your favorite report in Econ 135 that the average 10 year holding period return is about 7% with a standard deviation of 6%. Do you think your fi end?s expectations are realistic? Why or why not?

Explanation / Answer

As after 10 year, Investment rose to 19672$ expected with Standard daviation of 6%

Even if after positive daviation the expected Investment comes our to 33000$. So, expectations of friend is totally unrealistic based on facts and figures provided.

CPI S&P 2011 226 2159 2012 230 2504 2013 233 3316 2014 235 3769 (A) Return for 2011-12 (230-226)/226 (2504-2159)/2159 2% 16% Return for 2012-13 (233-230)/230 (3316-2504)/2504 1% 32% (B) Return for 2 year 2011-13 (233-226)/226 (3316-2159)/2159 3% 54% © Total Investment 10000$ Annual return (As per Econ) 7% Holding after 10 year(assuming Tax rate as Nil) 0 1 2 3 4 5 6 7 8 9 10 10000 10700 11449 12250 13108 14026 15007 16058 17182 18385 19672 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 700 749 801 858 918 982 1051 1124 1203 1287

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