© 2000 John Petroff
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© 2000 John Petroff |
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Assignments, Cases & Exercises
Research assignments:
R-2B.1 Select a stock, a bond and any personal asset, and establish for each the cash flows that give it value, the irrelevance of past information and the need to consider alternative assets. Check also that the cash flows verify their theoretical formulation of being net incremental after-tax changes in wealth.
R-2C.1 Take out a textbook on actuarial mathematics from the library. Verify the mathematical proof of the formulas used in finance. Investigate the uses of actuarial mathematics in fields such as insurance.
R-2D1.1 Choose a bond (e.g. take a recently issued utility bond such as that of a major electric company). Obtain yields recently offered on comparable bonds. Calculate the bond value using three different approaches: with actuarial tables, scientific calculator and spreadsheet. Justify differences between calculations.
R-2D2.1 Obtain statistics on recent interest charged in different countries around the world from any major business publication. Obtain estimates of inflation rates in the same countries. Calculate real rates for each country using first the approximate formula, then the exact formula. Discuss the magnitude of the error from the approximate formula for different levels of inflation.
R-2D3.1 Study a historical analysis of the business cycle over the past century in the United States. Establish a correlation between period of strong investment demand with high interest rates. Establish a correlation between money velocity and high level of consumption.
R-2D4.1 Determine the shape of the yield curve at the time of your reading of this question. Offer justifications for its shape. Read the literature explaining changes in yield curve shape. Find examples of unusual yield curve shapes in the past or in other countries and establish whether the theoretical reasons for the unusual shape are present.
R-D5.1 Read reports on unusually easy or tight monetary policy in the past century in the United States or elsewhere, and establish the presence of additional distortions in yield curve during those times.
R-2D6.1 Look into historical rates of return on different types of assets (i.e. government securities, corporate bonds and stocks) in other countries than the United States, that can be found in data sources such as OECD or domestic financial circles. Establish a parallel between the risk-return observed in Ibbotson quoted statistics in the text with the pattern in other countries.
R-2E1.1 Read any advanced text on
modern portfolio theory that describes capital assets pricing
model. Verify the theoretical justification of BETA as a measure
of stock risk.
Derive the formula for BETA.
R-2E2.1 Go over the reasons for BETA instability in the textbook used for the previous question. Report on the justification of using adjusted BETA's.
R-2E3.1 Using the same sources as those cited in Tables T-2.3 and T-2.4, retrieve values of BETA for the same companies and industries listed in the tables. Discuss the possible causes of any differences present. Using the same sources as cited in the example for Silicon Graphics, update calculation of the rate of return of Silicon Graphics. Comment if needed.
R-2E4.2 Glean through the literature on efficient market hypothesis and the objections of practitioners to its validity. Cite articles that offer a compromise between academics and practitioners. Present your own point of view.
R-2G.1 Prove each of the theorems presented in the text in the Theorem section. Demonstrate their practical importance.
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