耶鲁大学公开课

Econ252Midterm1Answers

BACKFILLBIAS?WHATISSURVIVORBIAS?HOWDOTHEY

LEADTOERRORSINEVALUATINGINVESTMENTOUTCOMES?

ThetermswereudbyDavidSwenninhislecture.

backfillbias:Whenahedgefundisaddedtoanindex,thefund'spastperformance

maybe"backfilled"mple,ifthefundhasbeeninbusinessfortwo

yearsatthetimeitisaddedtotheindex,pastindexvaluesareadjustedforthotwo

yearstoreflectthefund'indexesbackfill,but

y,ahedgefundwillstartcontributingdatatoan

heoldesttricksin

investmentmanagementistolaunchmultipleinvestmentfundsandthenmarkettho

cticeisalsocommonamonghedgefunds,who

,indexproviders

yincludea

minimumastsundermanagementrequirement,andsuccessfulfundsaremorelikelyto

ary,successfulfundsaremorelikely

tobeaddedtoanindexthanunsuccessfulones,

backfillingisobviouslyaquestionablepractice,

providerfirstlaunchesanindex,theyhaveanunderstandabledesiretogobackand

ookattimeriesofhedgefund

indexperformancedata,youwilloftennotethatindexeshaveverystrongperformancein

thefirstfewyears,andthismaybeduetobackfilling.

survivorshipbias:Whenafundisdroppedfromanindex,pastvaluesoftheindex

maybeadjustedtoremovethatdroppedfund'ably,afundwillbe

droppedfromanindexifitstopsprovidingitsperformancedatatotheindexprovider,

,

providersmayhavecriteriafordroppingafund,andthismaynaturallycaupoor

performerstobedroppedmoreoftenthangoodperformers

grading:

-1point:statingthearebiasthataffectasssmentofreturns,butnospecific

definitions

-2points:forabovepluscorrectdefinitionofoneofthebias

-4pointsforcompletedefinitionsofboth

SUMPTIONSARENEEDEDTODERIVETHECAPITALASSET

PRICINGMODEL(CAPM)?

FMJF,Pg253

-onepointforeachreasonlistedbelow

oriskaverinvestorswhomeasureriskintermsofportfolioreturn

standarddeviation

oallinvestorshavesametimehorizon

oallinvestorshavesameexpectationsaboutfuturecurityreturnsandrisks

ocapitalmarketsperfect:astscompletelydivisible,notransactionscosts

ordifferentialtaxes,borrowingandlendingratequaltoeachotherand

sameforallinvestors

grading:

-1pointforeachcorrectlystatedassumption

-0pointsforstatementofwhatyouneedtoutheCAPMformula(,riskfree

rate,marketreturn)

UNIVERSITYENDOWMENTMANAGERSREACTTOTHESTOCK

MARKETCRASHOF1987,ANDHOW,ACCORDINGTODAVIDSWENSON,

SHOULDTHEYHAVEREACTED?

universityendowmentsallocationtostockscontractedintheyearsfollowing1987by

morethanthedeclineinthestockmarket,andsothisindicatesthattheywerelling

pearstobemarkettiming,whichSwenn

etheydidthis,theymisdoutonsomeoftheriinstockthe

stockmarketintheearly1980s.

grading:

-0point:incorrectexplanationofwhatendowmentmanagersdid

-1point:generalstatementofendowmentsleavingthemarketbutnospecificmentionof

aststheyleft,aststheyentered,etc.

-2points:mentionendowmentsreducedallocationtostocks

-4points:mentionendowmentsreducedallocationtostocksandSwensonsaidthey

shouldhavestayedinstocks

THE“DEMOCRATIZATIONOFFINANCE”BEADVANCED

THROUGHFINANCIALINNOVATION?

Thedemocratizationoffinancereferstotheuoffinancebymoreandmorepeople,

whichwasthesubjectofLecture3,aswellastheIntroductiontomybookNewFinancial

Order(Introduction)e:aninsurancepolicy,

socialcurity,etc.,institutionsthataredesignedforthebroadpublic.

grading:

-2points:answerthatdemocratizationoffinanceistheuoffinancebymoreandmore

people

-4points:answerthatdemocratizationoffinanceistheuoffinancebymoreandmore

peopleandgivenanexampleoffinancethatisudbythebroadpublic(insurance,social

curity)

CLOSEDENDFUNDSDIFFERENTFROMOPEN-ENDFUNDS?

WHYMIGHTTHEPRICEOFASHAREOFACLOSEDENDFUNDDIFFERFROM

ITSNETASSETVALUE?

CEFfundsissueafixednumberofsharesuponinceptionandthesharesaretradedonan

re3importantdifferencesbetweenOEFandCEF

a)thenumberofsharesofanOEFvariesbecauthefundsponsorwillllnew

vea

constantnumberofsharesoutstandingbecauthefundsponsordoesn’tredeem

sharesandllnewsharestoinvestors(exceptatthetimeofanewunderwriting)

b)priceofOEF=fCEFmaybeaboveorbelowNAV

c)CEFsharesaretradedonanexchange

PriceofashareofCEFdependsonthesupplyanddemandsoitmaybeaboveorbelow

.,ifinvestorsbecomepessimisticaboutfutureprospectsofthefund,theywill

pushthepricebelowNAV

grading:

-0points:noanswer

-1pointeachfor

-mentiondifferencein#ofoutstandingsharesbetweenCEFandOEF

-mentionOEFvalueequalsNAV,CEFcanbebeloworabove

-CEFsharestradedonanexchange

-4points:mentionallabovepluxplanationthatsupplyanddemandexplainwhyCEF

canbeaboveorbelowNAV

URYINFLATIONPROTECTEDSECURITYPAYSACOUPONRATE

OF10PERCENTANDTHEANNUALINFLATIONRATEIS5PERCENT.

SUPPOSEYOUPURCHASE$NE

YEAR,WHATISTHEAMOUNTOFCOUPONPAYMENTYOUWILLRECEIVE?

Couponpayment=(100)*(1+.05)*(.1)=10.5

ponrateispaidoftheprincipalamountadjustedforinflation.

0points–justgivinganumberwithoutanyworkshown

2points–clearlyshowedthatunderstoodbothinflationANDcouponrateareneededto

calculatedthecoupon,butdidnotutheminthecorrectway.

4points–correctcalculation

EINTHEMONEYSUPPLYHASTHEREDIFFERENTEFFECTS

UPONTHELEVELOFTHEINTERESTRATE:THELIQUIDITYEFFECT,THE

INCOMEEFFECT,Y

DESCRIBETHESETHREEEFFECTS.

Liquidityeffect:reprentstheinitialreactionoftheinterestratetoachangeinthe

nmoneysupplyshiftsthesupplycurveoutwardcausingadecline

ininterestrate.

Incomeeffect:anincreainMSisgenerallyexpansionary,ateincome

formoneyisafunctionofincomesodemandcurveshiftsoutcausing

ariininterestrate.

PriceExpectationffect:althoughanincreainMSisaneconomicallyexpansionary

policy,theresultantincreainincomedependssubstantiallyontheamountofslackin

conomyisoperatingatfull-employmentlevel,thenanincreain

oneydemandisa

functionofexpectedpricelevel,thepriceexpectationffectisashiftindemandand

thusanincreaininterestrate.

grading:

-0points:descriptionofeffectsthatdoesnotclearlyexplainhowtheyareeffectsofthe

moneysupplyontheinterestrate

-2point:correctlydefineoneoftheeffects

-3points:correctlydefinetwooftheeffects

-4points:correctlydefinethreeoftheeffects

,ACCORDINGTOSIEGEL,ISTHEBROADHISTORICALTRENDIN

STOCKMARKETVOLATILITY,ANDWHATKINDOFEVENTSAFFECT

VOLATILITY?

Siegel,Chapter16,especiallypagefigures16-3or16-4.

grading:

-0points:onlydiscussthatstocksbestreturninthelongrun,nodiscussionofvolatility

-1point:generalstatementaboutstocksbeingbestinthelongrunandmention

somethingaboutmarketvolatility,butnospecificdiscussionofhowmarketvolatilityhas

changedovertime

-2points:statethatSiegelpointsoutthatitisstrikingthat“thereissolittleoveralltrend

ofanysortinthevolatilityofthemarket.”(pg278)

-4points:mentionaboveplusfactthatvolatilityishigherduringrecessions,lowerin

booms

THEEFFICIENTMARKETSHYPOTHESISANDWHATISITS

RELATIONTOTHERANDOMWALKTHEORYOFSTOCKPRICES?

Lecture6,therandomwalkhypothesissaysthatstockpricesarecompletely

unforecastable,whichisnotabsolutelynecessaryfromefficientmarkets,butreprents

theideaesntialtoefficientmarketsthatpricesrespondonlytonewinformation,which

isunforecastable.

grading:

-0points:nocorrectdefinitions

-1point:correctdefinitionofeitherEMHorrandomwalk

-2points:randomwalkhypothesismeansthatstockpricesarecompletely

tdefinitionofEMHandrandomwalk,butmadesomestatement

abouthowtheydirectlycontradicteachother.

-3points:above+statethatkeyideaisthatnewsisunforecasteable.

-4points:statethatrandomwalkisconsistentwithefficientmarketshypothesis,plus

correctdefinitionsofboth

STHEVALUEFUNCTIONOFPROSPECTTHEORYDIFFERFROM

THEUTILITYFUNCTIONOFEXPECTEDUTILITYTHEORY?

.3differences

a)valuefunctionisdefinedovergains/losswhileutilityfunctiondefinedover

totalwealth

b)valuefunctionconcave(convex)overgains(loss),utilityfunctionconcave

everywhere

c)valuefunctionhasakinkattheorigin,nokinkinutilityfunction

grading:

-1pointeachfor(a),(b),(c)listedabove

-+1pointifalsocorrectlydiscusdexpectedutilityineach

PartII

1.a.2250rupees

b.=500*(.5*.5/9)^0.5=500*.5/3=83.33rupees

c.4000rs

probabilityof9males=.5^9=1/512<1%,probof8males=9/ecompanyholds

eprobofinsolvency=9males<1%.

Grading:

2pointsforeachpartcorrectlyanswered

2.

ENCYLINE

’peofthelineconnectingthe

pointonthey-axisisgreaterthantheslopeofthelinethatgoesfromthetangency

portfoliooutward.

Grading:

a)ullpoints,youhadtoshowthefrontier,correctlylabelthe

axes,atwithoutrisk-freeast

thereisnotangencyline.0pointsweregivenifyoudrewatangencyline.

b)tiontoshowingthefrontierinparta)youhadtoshowthe

“kinkedtangency”atthekinkisatthepointwherethestandard

tangencylineistangenttotherisky-ast-onlyfrontier.0pointsweregivenifyou

drewthestandardtangencyline.

estockAhasa0.1%standarddeviationandstockBhasa50%percent

50/50portfolio

betweenthetwohasagreaterreturnstandarddeviationthaninvestingitallinstockA

(utheformulaforportfoliovariance).

Grading:

intsgivenifclearlyexplainedusinganexampleoradiagram,in

yougotthe

answerright,butgaveincorrectreasoning(littleornocreditwasgivenforsuch

answers)

ormulasgiveninlecture,solvefordiscountintermsofyield:

Grading:

4pointsforasked,2pointsforprice

5.A)ER=3+1.5x(10-3)=13.5%

B)PV=1000/(1.135)-200/(1.135)^2+700/(.135-.02)(1.135)^2

=5,450.88

Grading:

a)2points

b)atyouneedtodiscountthe700/(.135-.02)term.

Also,togetfullpoints,youhadtosimplifytheinfinitesumusingthe‘PVof

growingstreamofpaymentsformula’