Calculate summary statistics of monthly returns on INSUR using historical data from January 2016 to December 2020 Details on INSUR INSUR is an exotic insurance product that aims to help investors manage its exposure to market risk. This product requires policyholders (i.e., buyers of INSUR) to pay insurance premium (i.e., purchasing price of INSUR) at the beginning of the calendar month. INSUR matures at the end of the month and makes payment (if any) to policyholders according to the performance of the S&P 500 Index in that month. If (1) the return on the S&P 500 Index is negative and (2) the monthly standard deviation of return on S&P 500 exceeds 0.025, INSUR will reimburse the insurance premium paid at the beginning of the month and provide additional compensation to its policyholders. The additional compensation amount is the product of the following two components: (1) 150 times the insurance premium, and (2) the monthly standard deviation on the S&P 500 return in excess of 0.025. If the return on S&P 500 is positive or if the monthly standard deviation does not exceed 0.025, INSUR does not make any payment at the end of the month and the policyholder loses all her investment. That is, the monthly return of holding INSUR is (-100% if rt ≥ 0 or at s 0.025 (or -0.025) x 15000% if rt <0 and ot> 0.025, where rt is the return on the S&P 500 Index for month t,\sigma_t()is the monthly (non-annualized) standard deviation of return on S&P 500. or 2 is estimated using the Exponentially Weighted Moving Average (EWMA) method with a decay factor of 0.85 and historical monthly return prior to month t (i.e., rt is not used to estimate\sigma_t()). As an example, suppose an investor holds INSUR in January 2022. Also assume that the monthly return on S&P 500 for the month is -0.6%, and the monthly standard deviation of return on S&P 500 is 0.0415, calculated using historical data until December 2021. In this case, this investor's monthly return for holding INSUR is 15,000 % × (0.0415 -0.025) = 247.5%. from the given information, how is the INSUR calculated, please provide excel formula?
Calculate summary statistics of monthly returns on INSUR using historical data from January 2016 to December 2020 Details on INSUR INSUR is an exotic insurance product that aims to help investors manage its exposure to market risk. This product requires policyholders (i.e., buyers of INSUR) to pay insurance premium (i.e., purchasing price of INSUR) at the beginning of the calendar month. INSUR matures at the end of the month and makes payment (if any) to policyholders according to the performance of the S&P 500 Index in that month. If (1) the return on the S&P 500 Index is negative and (2) the monthly standard deviation of return on S&P 500 exceeds 0.025, INSUR will reimburse the insurance premium paid at the beginning of the month and provide additional compensation to its policyholders. The additional compensation amount is the product of the following two components: (1) 150 times the insurance premium, and (2) the monthly standard deviation on the S&P 500 return in excess of 0.025. If the return on S&P 500 is positive or if the monthly standard deviation does not exceed 0.025, INSUR does not make any payment at the end of the month and the policyholder loses all her investment. That is, the monthly return of holding INSUR is (-100% if rt ≥ 0 or at s 0.025 (or -0.025) x 15000% if rt <0 and ot> 0.025, where rt is the return on the S&P 500 Index for month t,\sigma_t()is the monthly (non-annualized) standard deviation of return on S&P 500. or 2 is estimated using the Exponentially Weighted Moving Average (EWMA) method with a decay factor of 0.85 and historical monthly return prior to month t (i.e., rt is not used to estimate\sigma_t()). As an example, suppose an investor holds INSUR in January 2022. Also assume that the monthly return on S&P 500 for the month is -0.6%, and the monthly standard deviation of return on S&P 500 is 0.0415, calculated using historical data until December 2021. In this case, this investor's monthly return for holding INSUR is 15,000 % × (0.0415 -0.025) = 247.5%. from the given information, how is the INSUR calculated, please provide excel formula?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Calculate summary statistics of monthly
returns on INSUR using historical data from
January 2016 to December 2020
Details on INSUR INSUR is an exotic insurance
product that aims to help investors manage its
exposure to market risk. This product requires
policyholders (i.e., buyers of INSUR) to pay
insurance premium (i.e., purchasing price of
INSUR) at the beginning of the calendar
month. INSUR matures at the end of the
month and makes payment (if any) to
policyholders according to the performance
of the S&P 500 Index in that month. If (1) the
return on the S&P 500 Index is negative and
(2) the monthly standard deviation of return
on S&P 500 exceeds 0.025, INSUR will
reimburse the insurance premium paid at the
beginning of the month and provide
additional compensation to its policyholders.
The additional compensation amount is the
product of the following two components: (1)
150 times the insurance premium, and (2) the
monthly standard deviation on the S&P 500
return in excess of 0.025. If the return on S&P
500 is positive or if the monthly standard
deviation does not exceed 0.025, INSUR does
not make any payment at the end of the
month and the policyholder loses all her
investment. That is, the monthly return of
holding INSUR is ( -100% if rt 20 or ot s
0.025 (ot-0.025) x 15000% if rt < 0 and ot>
0.025, where it is the return on the S&P 500
Index for month t,\sigma_t()is the monthly
(non-annualized) standard deviation of return
on S&P 500. ot 2 is estimated using the
Exponentially Weighted Moving Average
(EWMA) method with a decay factor of 0.85
and historical monthly return prior to month t
(i.e., rt is not used to estimate\sigma_t{}). As
an example, suppose an investor holds INSUR
in January 2022. Also assume that the
monthly return on S&P 500 for the month is
-0.6%, and the monthly standard deviation of
return on S&P 500 is 0.0415, calculated using
historical data until December 2021. In this
case, this investor's monthly return for holding
INSUR is 15,000% x (0.0415 -0.025) =
247.5%.
from the given information, how is the INSUR
calculated. please provide excel formula?
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