Homework Class 1

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School

Boston College *

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2260

Subject

Finance

Date

Apr 3, 2024

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pdf

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Uploaded by KidThunderSeaUrchin19

1. What is an asset class, and why are they important in investment portfolios? 2. What are the main differences between equities and bonds as asset classes? 3. What are the primary distinctions in terms of priority of payment during bankruptcy or liquidation for equity holders versus bondholders, and how does this affect their respective positions in a company's capital structure? 4. How do equities and bonds diverge in terms of income generation for investors? Could you elaborate on the mechanisms through which each asset class provides income and how these may vary in stability and potential yield? 5. In terms of market behavior, how do equities and bonds typically react differently to changes in interest rates, economic conditions, and market sentiment? Can you provide examples of scenarios where one asset class might outperform the other under specific circumstances? 6. Could you explain the various methods investors use to gain exposure to commodities, including direct physical ownership, futures contracts, and exchange-traded funds (ETFs)? What are the advantages and risks associated with each of these approaches in terms of investing in commodities as an asset class? 7. What are alternative investments, and why might investors consider them? 8. How do alternative investments respond to economic downturns or market volatility compared to more conventional asset classes? Could you provide examples of how alternative investments have historically demonstrated resilience or unique performance characteristics in challenging market environments? 9. What are the similarities and differences between cash and volatility as an asset class. 10. Using the below dataset calculate STD (Standard deviation) of IBM Daily Returns IBM Equity 8/1/2023 143.33 8/2/2023 144.17 8/3/2023 144.45 8/4/2023 144.24 8/7/2023 146.18 8/8/2023 145.91

8/9/2023 142.49 8/10/2023 143.25 8/11/2023 143.12 8/14/2023 141.91 8/15/2023 141.87 8/16/2023 140.64 8/17/2023 140.66 8/18/2023 141.41 8/21/2023 142.28 8/22/2023 141.49 8/23/2023 143.41 8/24/2023 143.55 8/25/2023 144.595 11. Probability of Stock ABC to achieve 20% return is 50%. Probability of stock XYZ to achieve 100% return is 10%. Which is a better investment? 12. Could you explain how the empirical rule (68-95-99.7 rule) is used to describe the spread of data in a normal distribution? Provide an example to illustrate how this rule helps in understanding the distribution of values within certain standard deviations from the mean. 13. In real-world applications, can you provide an example of a phenomenon that closely follows a normal distribution? Additionally, discuss how the properties of the normal distribution, such as the empirical rule (68-95-99.7 rule), can be applied to understand the distribution's characteristics and make probabilistic predictions. 14. How does the concept of correlation help in quantifying the degree and direction of the relationship between two variables, and how is it interpreted in terms of values ranging from -1 to 1? 15. How does the concept of correlation help in quantifying the degree and direction of the relationship between two variables, and how is it interpreted in terms of values ranging from -1 to 1?

16. For the Data Set below calculate arithmetic and geometric returns SPX Index 7/3/2023 4455.59 7/5/2023 4446.82 7/6/2023 4411.59 7/7/2023 4398.95 7/10/2023 4409.53 7/11/2023 4439.26 7/12/2023 4472.16 7/13/2023 4510.04 7/14/2023 4505.42 7/17/2023 4522.79 7/18/2023 4554.98 7/19/2023 4565.72 7/20/2023 4534.87 7/21/2023 4536.34 7/24/2023 4554.64 7/25/2023 4567.46 7/26/2023 4566.75 7/27/2023 4537.41 7/28/2023 4582.23 7/31/2023 4588.96 8/1/2023 4576.73 8/2/2023 4513.39 8/3/2023 4501.89 8/4/2023 4478.03 8/7/2023 4518.44 8/8/2023 4499.38

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8/9/2023 4467.71 8/10/2023 4468.83 8/11/2023 4464.05 8/14/2023 4489.72 8/15/2023 4437.86 8/16/2023 4404.33 8/17/2023 4370.36 8/18/2023 4369.71 8/21/2023 4399.77 8/22/2023 4387.55 8/23/2023 4436.01 8/24/2023 4376.31 8/25/2023 4382.76 17. Annualize the result from the question above 18. Suppose that the one year rate of return for a portfolio has an expected value of 5% and an STD of 2.5% and that the probability distribution is normal • What is the probability that the on-year rate of return will be between 1.5% and 7.5% • What is the probability that the one-year rate of return will be between 0 and 10% • What is the probability that the one-year rate of return will be negative • What is the probability that the one-year rate of return will be greater that 15% 19. Explain why you agree or disagree with the following statement "the correlation coefficient indicates the degree to which one random variable depends on another.