allow alternatives if you can demonstrate a model to me that will not run on your laptop.

Transcription

1 Econ 136 Second Exam Tips Spring Please remember that because of the honor code violation on the last exam (not in this class) that this exam must be taken in the room during exam hours no take-home and no exams taken outside of the class. 2. However, you are allowed to use your computer for part of the exam and indeed must use your computer for part of the exam. Therefore you must bring a computer to class to use for the portion of the exam based upon the homework that has been assigned. 3. In preparing for the exam you are allowed to seek help from classmates about making the models work and checking answers to make sure you all agree. You are required however to design your own homework models. 4. You must have all homeworks completed from HW2 to HW5 and ready to use by plugging new values or arrays provided by me during the exam period your exam answer will consist of telling me new answers on the exam. This will be somewhat experimental so I will work with you to relieve stress and will cut you considerable slack if you have trouble with this process. 5. You are allowed and even encouraged to develop and use your own versions of these models on Mathlab or your own language (some of my own non-teaching versions are in Visual Basic and work only on my big machine) but it must work in class, although I will allow alternatives if you can demonstrate a model to me that will not run on your laptop.

2 .. cont.. 5. There will be other traditional questions based upon the lectures and interpretations of the HW. HW2: Calculating correlation, relative volatility, the Beta SPY vs. CSCO CSCO One year data Correlation: Ratio of SD: Beta: day data Correlation: Ratio of SD: Beta: One Year: Mean DCGR: Standard Deviation: Min DCGR: Max DCGR: Min Norm DCGR: Max Norm DCGR: I had you download data for CSCO to compare to SPY, which you did in HW1. I also asked you to find a second stock and try it as well. On the exam, be prepared to override CSCO with an array that I will ask you to download from the class web site to also compare to SPY. I will ask you for answers and interpretations. 2. Remember how to interpret what you are reviewing. Why can we not use the Beta alone? What impact would the addition of this stock have if it was added to an S&P 500 portfolio upon that portfolio s metrics? 3. What did we have to say about the extreme DCGRs in this HW set?

3 ... cont... Homework 3 Estimating Portfolio Variance for a 4-stock portfolio Weights INTC BAC MO JWN Sum: n n n 1 n 2 VAR ixi VAR x COV x x i 1 i 1 i 1 j ( i 1) 2, i i i j i j DCGR Mean Var SD INTC BAC MO JWN Correlation Matrix INTC BAC MO JWN INTC BAC MO JWN Covariance Matrix INTC BAC MO JWN INTC BAC MO JWN Weighted portfolio variance: Weighted portfolio volatility: Portfolio alpha: Annualized Portfolio alpha: E There are two things I can ask you to do about this complicated HW during the exam: (a) change the weights and report the results, (b) give new data for one or two of the stocks to override what you now have and report the results. 2. I can ask many interpretations here about what we do want to see and don t want to see if the correlation and covariance matrices. 3. What is the interpretation t ti of the weighted ihtd portfolio volatility and what kind of metrics do we want to see there (based upon our class discussion and common sense)? 4. How do we improve this portfolio?

4 .. cont.. Homework 4: Strike Price Probability Calculator STRIKE PRICE PROBABILITY CALCULATOR 1. Make sure your answer for the 2014 HW agrees with the final value below remember that you have to shift the distribution by the amount of the estimated growth due to the alpha, which is the daily growth rate times 8! (The probability assuming zero growth and Option do not make this shift equals ). 2. Obviously for this I will just provide you with different values be prepared to calculate l one with an assumption of zero alpha and a non-zero estimated alpha (as we did in our HW). Analyst's Name: Evans Date Today: 3/14/14 Stock Stock Symbol: SPY StockPrice: Option Strike Price: 190 Option Expiration Date: 3/22/14 Option Price (Best Ask): Days to expiration: 8 Historical Data Log Growth Rate Price to Strike Price: Sample Mean Daily Growth Rate: Sample Daily Standard Deviation: Time adjusted Standard Deviation: Calculation Probability of Stock Price Greater than Strike Price at Expiration: In this I may ask you to use a diagram to explain what we are doing here, as I explained it to you in my own slides.

5 Homework 5 The Aruba Options Model (writing covered calls) Option Yield Calculation Version 7.3 (March 12, 2014).. cont.. STRIKE PRICE PROBABILITY CALCULATOR and Aruba Expected Value Calculator Analyst's Name: Gary Evans Name of analyst: Evans Date Today: 3/12/14 Date: March 12, 2014 Stock Stock Symbol: SPY Stock Name: SPY Stock Price: Price (Ask) of stock (PPS): Option Symbol (optional): SPY Call Option Strike Price: 190 Number of shares (N): 100 Call Option Expiration Date: 4/19/14 Buy Fees (BFee): 7.00 Sell Fees (SFee): 7.00 Call Option Price: Days to expiration: 38 Option Historical Data Strike price (SPO): Sample Mean Daily Growth Rate: Month: Apr Sample Daily Standard Deviation: Price (Bid) of option (PO): Date of option expiration: April 19, 2014 Expected Price at Expiration: Time adjusted Standard Deviation: Results Calculation Contract days: 38 Probability of Stock Price Greater Unexercised Option Yield (UOY): 5.71% Projected Exercise Yield (PEY): 19.21% than Strike Price at Expiration: UOY - absolute: 0.59% PEY - absolute: 2.00% Expected rate of Return of Covered Copyright Gary R. Evans Call (annualized) Expected rate of Return of Covered Call (absolute) This important HW set and its implications will be discussed in class on Tuesday. Version 7.3 March 12, 2014

6 Non-homework material on this exam:... cont What is the point of trying to pinpoint any 7-sigma data observations in our studies how might we use them? 2. How is the traditional i Beta calculated l and why is it important to split it into its components? 3. Guaranteed heavily weighted question: You will not be asked the formula for either weight-adjusted 2-asset portfolio variance or weight-adjusted n-asset portfolio variance, but you may find it helpful to remember it, because you may be asked about the primary principals or rules for stock portfolio building and what the portfolio variance models and formulas tell you about what contributes to risk reduction in a portfolio and adds risk to a portfolio. 4. What is the risk-yield efficiency frontier and what does it represent? What do values to the interior represent? What do values to the exterior (above the line) represent t[ [nott discussed d in lecture but strictly tl logical]. l] 5. What was the fundamental investment mistake made by the geniuses in When Genius Failed What is the fundamental investment t strategy t of Stat t Ab? Arb?

7 ... cont [Material on variable options impact, time decay, volatility, and distance was largely a prep for what comes next (options pricing models) and is not covered on this exam]. 8. Understand the basic strategy (by pulling data off of an options chain to set one up) for: a) strangle b) collar c) iron condor d) butterfly 9. What were we doing in the NormBase file (background for HW4) what was that transformation and what did it represent? 10. Definition of a futures option. 11. How are futures options settled? 12. What are SPX and XSP options and what can you tell me about them? 13. What is the concept behind Unexercised Option Yield and Projected Exercise Yield in the Aruba model?