The web exercises for this chapter explores asset allocation from the viewpoint of the goals of individual investors. A good website of information on portfolio construction from the point of view of the individual is the Vanguard's Personal Financial Portfolio Planning site maintained by Vanguard.
Exercise1: Stock returns and Inflation: Use monthly rates of change in the Consumer Price Index to measure inflation. This data is available from Economagic. Use monthly rates of return on the S&P 500, also using data from Economagic. How closely are the two series correlated? Does this correlation change over time? Check whether this pattern is similar in other countries using data from Global Financial Data.
Exercise 2: You can find data on the annual close of the S&P 500 for the period 1800-1998 available at Global Financial Data. Fix a starting point, say T = 1940, for the following experiment. Select a holding period, say i years. Compute the annualized rate of return for the different non-overlapping holding periods: from T to T+i, from T+i to T+2i, etc. continuing until you run out of data. Take the natural logarithm of (1+the annualized return) to obtain the continuously compounded return. The resulting returns should be close to normally distributed. Use these returns to estimate the mean return and standard deviation of returns for the different holding periods. For each holding period, use normal probability tables to determine the probability of achieving different annual rates of return. Tabulate your results with different holding periods in each row and different return levels in each column. Plot these numbers. Do you perceive any patterns?