This chapter analyzes the returns and risks from investing. Obviously, a first step is measuring these quantities. The web exercises will address the measurement of returns, and of risk.
Exercise 1: Using Prof. Jones annual data, compute the mean and standard deviation of the annual total return on a portfolio representing the S&P 500. Use inflation information and compute the same quantitites for the real return. Do the same for the portfolio of 20 year corporate bonds.
Break up the entire period from 1870 to 1997 into several subperiods and compute the mean return and standard deviation of returns, once again. Does there seem to be significant variation over time? Consider the the returns during the different subperiods to be different samples, and perform the appropriate statistical test to examine if the mean returns have changed from period to period.
Exercise 2: Collect similar information on the NYSE Index from the NYSE site. Do the same exercise with NYSE Index data for the composite index, and for the industrial, transportation, finance and utility sub-indexes.
Download secondary market yields on 3-month Treasury bills. Compute the mean and standard deviations for the entire period and for different subperiods.
Can you perceive a relationship during a given period between the standard deviation of returns on a given kind of security or portfolio and its mean return?
Exercise 2: Choose any time series of security or index returns. Compute the arithmetic average return for the period and the geometric average return for the same period. Which is greater? Why? Which would you use and for what purpose?
You can find data on many other stock index time series at http://www.economagic.com/.