1. You have already tasted finance theory in your core course,whatever version ofFinance 101you took wherever and whenever you took it.Discuss the relevance of ‘theory to practice’ in relation to Items 7 & 8 readings.
2.
State your prediction for annual WRORCYRE for 2022, 2023, 2024, 2025, 2026 with a brief justification. Cite a specific percentage, not a range. Use this link for a long term view of S&P 500 Index performance:
https://markets.ft.com/data/indices/tearsheet/charts?s=INX:IOM
1. You have already tasted finance theory in your core course, whatever version of Finance 101 you took wherever and whenever you took it. Discuss the relevance of ‘theory to practice’ in relation to Items 7 & 8 readings. ITEM #7 Ibbotson-Sinquefield Long-Term Rates of Return and Risk Table, Damodaran Update, and THREE SENSATIONAL GRAPHICS NOT TO MISS · third column. 20.2% for large-company stocks is something to remember, as is the 32.9% for small-company stocks – more than half-again the number for large-company stocks. Aswath Damodaran of New York University provides the following tables, updating the one above, through 2019 (starting with 1928 instead of 1926). The rates of return change. Since the standard deviations do not appear, use the ones from the above table (although they will also change to some extent). He also includes equity risk premia – discussed below – read the column labels as “rate of return on stocks minus rate of return on t-bills”, and so on. The equity risk premium is the extra return demanded by equity investors over and above the return they demand on government bonds. The table above may be one of the most important in investing. It shows common stock rates of return for holding periods ranging from 1 year to 25 years. Notice that the average rate of return is similar for all holding periods, but the standard deviation (depicted with boxes) narrows as holding period increases. Link to Chart of S&P 500 Stock Market Index from 1950-present S&P 500 Index. The chart below from Yahoo Finance is shown for perspective, so you can trace the history of this stock market index since 1950. The top panel shows the price index; the bottom panel shows volume in billions of shares traded. Take special note of: · Almost flat performance (about 0% rate of return before dividends) from mid-1960s through early 1980s after Reagan was elected. For this time period, the Security Market Line (SML) would have a negative slope (rather than its normal positive slope) because of counterintuitive results: risky securities (stocks) had lower rates of return than default-free securities (government bonds). · The crash of 1987 · The spectacular run-up until 2000 · The January 2000 and January 2007 peaks · The June 2007 meltdown and recovery at January 2013 when the previous peak was exceeded · The peak at January 2016 · The Spring 2020 dive and the subsequent recovery. http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5EGSPC;range=my Use the link above to view a current S&P 500 historical chart. Click ‘Max’ to display performance since 1950. Use the interactive feature to move horizontally through the chart. Click the links below to view three extraordinary graphics. “All the World’s Stock Exchanges by Size” in one visualization, by Jeff Desjardins – February 17, 2017. Don’t miss it; it’s fabulous. (The same graphic is an item on the Week 9 Bb page.) https://www.visualcapitalist.com/all-of-the-worlds-stock-exchanges-by-size/ Another Jeff Desjardins graphic is “Stock Market Returns Over Different Time Periods (1872-2018), dated March 11, 2019. It shows the vitally important fact portfolios help over long time horizons exhibit reduction rate of return volatility. https://www.visualcapitalist.com/stock-market-returns-time-periods-1872-2018/ https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020/ Zoom the graphic below to put the media-hyped daily point drops in the stock market in proper perspective. Always think in ratio terms (ratios, relatives), not absolutes. &Otl.lU !IV ITEM #8 5 WAYS TO MEASURE MUTUAL FUND RISK By Richard Loth, Investopedia There are five main indicators of investment risk that apply to the analysis of stocks, bonds and mutual fund portfolios. They are alpha, beta, R-squared, standard deviation and the Sharpe ratio. These statistical measures are historical predictors of investment risk/volatility and components of modern portfolio theory (MPT). The MPT is a standard financial and academic methodology used for assessing the per equity, fixed-income and mutual fund investments by comparing them to market benchmarks. All of these risk measurements are intended to help investors determine the risk-reward parameters of their investments. In this artic brief explanation of each of these commonly used indicators. Alpha
Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund por compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the bench its "alpha." Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. Alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate a underperformance of 1%. For investors, the more positive an alpha is, the better it is. Beta
Beta, also known as the "beta coefficient," is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment's return to respond to swings in the market. By definition, the market has a beta of 1.0. Individual security and portfolio values are measured according to how they deviate from the market. A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment is less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile t market. For example, if a fund portfolio's beta is 1.2, it's theoretically 20% more volatile than the market. Conservative investors looking to preserve capital should focus on securities and fund portfolios with low betas, whereas those invest take on more risk in search of higher returns should look for high beta investments. R-Squared
R-Squared is a statistical measure that represents the percentage of a fund portfolio's or security's movements that can be explained b in a benchmark index. For fixed-income securities and their corresponding mutual funds, the benchmark is the U.S. Treasury Bill, and equities and equity funds, the benchmark is the S&P 500 Index. R-squared values range from 0 to 100. According to Morningstar, a mutual fund with an R-squared value between 85 and 100 has a per record that is closely correlated to the index. A fund rated 70 or less would not perform like the index. Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as b index funds. In these cases, why pay the higher fees for so-called professional management when you can get the same or better result index fund? Standard Deviation
Standard deviation measures the dispersion of data from its mean. In plain English, the more that data is spread apart, the higher the d from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating f expected returns based on its historical performance. Sharpe Ratio
Developed by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting rate of return (U.S. Treasury Bond) from the rate of return for an investment and dividing the result by the investment's standard dev return. The Sharpe ratio tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. This is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if those hi not come with too much additional risk. The greater an investment's Sharpe ratio, the better its risk-adjusted performance. The Bottom Line
Many investors tend to focus exclusively on investment return, with little concern for investment risk. The five risk measures we have can provide some balance to the risk-return equation. The good news for investors is that these indicators are calculated for them and on several financial websites, as well as being incorporated into many investment research reports. As useful as these measurements a mind that when considering a stock, bond or mutual fund investment, volatility risk is just one of the factors you should be considering that affect the quality of an investment. 2. State your prediction for annual WRORCYRE for 2022, 2023, 2024, 2025, 2026 with a brief justification. Cite a specific percentage, not a range. Use this link for a long term view of S&P 500 Index performance: https://markets.ft.com/data/indices/tearsheet/charts?s=INX:IOM Geometric Mean Arithmetic Mean Standard Deviation Large- company stocks 10.4% 12.3% 20.2% Small- company stocks 12.6% 17.4% 32.9% Long-term corporate bonds 5.9% 6.2% 8.5% Long-term government bonds 5.5% 5.8% 9.2% Intermediate- term government bonds 5.3% 5.5% 5.7% US Treasury bills 3.7% 3.8% 3.1% Inflation 3.0% 3.1% 4.3% Geometric Mean Arithmetic Mean Standard Deviation Large- company stocks 10.4%12.3%20.2% Small- company stocks 12.6%17.4%32.9% Long-term corporate bonds 5.9%6.2%8.5% Long-term government bonds 5.5%5.8%9.2% Intermediate- term government bonds 5.3%5.5%5.7% US Treasury bills 3.7%3.8%3.1% Inflation 3.0%3.1%4.3% S&P 500 (includes dividends) 3-month T.Bill US T. Bond Baa Corporate Bond Stocks - T.Bills Stocks - T.Bonds 1928-2019 11.57% 3.40% 5.15% 7.22% 8.18% 6.43% 1970-2019 11.89% 4.64% 7.39% 9.46% 7.26% 4.50% 2010-2019 14.02% 0.52% 4.35% 7.23% 13.51% 9.67% Stocks - T.Bills Stocks - T.Bonds 1928-2019 9.71% 3.35% 4.88% 6.96% 6.35% 4.83% 1970-2019 10.51% 4.58% 6.99% 9.18% 5.93% 3.52% 2010-2019 13.44% 0.51% 4.13% 7.06% 12.93% 9.31% Geometric Average Historical Return Arithmetic Average Historical Return Risk Premium 1. You have already tasted finance theory in your core course, whatever version of Finance 101 you took wherever and whenever you took it. Discuss the relevance of ‘theory to practice ’ in relation to Items 7 & 8 readings. ITE M #7 Ibbotson - Sinquefield Long - Term Rates of Return and Risk Table, Damodaran Update , and THREE SENSATIONAL GRAPHICS NOT TO MISS · third column. 20.2% for large - company stocks is some thing to remember, as is the 32.9% for small - company stocks – more than ha lf - again the number for large - company stocks