the requirement is in the word doc.Assignment 2 is about Assets, Assignment 3 is about Bonds.
The file should have the answers to each question clearly written, and any supporting figures, tables (perhaps from excel), diagrams, or graphs. Your answers should briefly describe what you are doing (for example, if describing a calculation using the CAPM, you should write something along the lines of “I used the following equation [CAPM equation], where the risk-free rate is XX%, beta is YY, and the market risk premium is ZZ%”), and provide the answer (as in “using the previous equation I found the expected return of the stock to be WW%”). Note that the graders will not be looking at spreadsheets with formulas, they will be reading your explanations and will grade you based on what you state and whether the numbers look reasonable. Any figures, tables or graphs you use should be clearly labeled and clearly referenced in the text. A good answer buried somewhere in a table, without a reference, will probably not be considered a good answer. It’s extremely important that you submit a professional, organized document. As with the labels, if the grader cannot understand what you did in a particular question, you will receive a lower score. A few extra points: Questions focus on calculations early on, and then transition to “conceptual” questions. I suggest you solve the numerical parts first, and then take some time to reflect and answer the “conceptual” parts. The rubric for questions that require calculations is: o 100% Perfect answer o 80% Minor numerical mistake o 60% Logical mistake but generally right o 40% Multiple logical and/or numerical mistakes o 20% A beginning, but mostly wrong o 0% Nothing, or barely anything. Questions that ask for an explanation, an opinion, or a judgement can mostly be answered in three to five sentences or less. Long, rambling, answers are confusing and I will consider them as weakening the argument. The rubric for these questions is: o 100% Sound argumentation and logic o 80% Argumentation misses an important point o 60% Argumentation has basically sound ideas, but misses an important point and has important weaknesses, such as a contradiction (note shorter answers have less risk of contradicting themselves), or faulty logic. o 40% An argument starting developing, but didn’t get far. A developed argument contradicted the main ideas we discussed during the course. o 20% An attempt to answer was provided, but it was off point. o 0% Empty answer HERE IS THE QUESTION: Part II (50 points): Investing in fixed-income We will create a special fixed-income portfolio, calculate its properties (return, volatility, beta, and Sharpe ratio), and then analyze what this means for investments. Please use the data in assignments 2 and 3 to complete this question（Note only use the Asset data，yields data）. The particular portfolio we are building is a “rolling STRIPS ladder”. In short, you can think of it as a portfolio that pays a constant amount per year for n years, where the amount it pays every year is reinvested so that after reinvestment the portfolio still pays a constant amount per year for n years (that’s the “rolling” part, you take today’s payment to buy a security that pays in n years). Let me provide more details below. A STRIPS (Separate Trading of Registered Interest and Principal Securities) is a security issued by the US Treasury, consisting of one payment generated by a US bond. For example, imagine that the government issues a 30-year bond. Rather than selling the whole bond, it proceeds to issue securities based on each cash flow the bond will generate (so that one security is the coupon payment from 2022, another security is the coupon payment from 2023, etc., and another security is the principal payment on 2050). Each of those securities are STRIPS (whoever created the acronym didn’t think long enough to realize the confusion created by the fact that a singular security would still be a STRIPS rather than a STRIP). Notice that for all practical purposes, each of those securities behaves like a zero-coupon bond. And, in fact, they replaced zero-coupon bonds when some clever bankers realized that it was much more practical to break bonds into pieces rather than issue the pieces independently. In short, STRIPS pay a single cash flow in the future. The face value of the STRIPS is the amount it pays. The zero-coupon yield curve is built from observing the prices of STRIPS at different maturities. If you buy a STRIPS with face value $1 paying in December of 2021, another with the same face value of $1 paying in December of 2022, another paying in 2023…until the last one paying in December of 2040, you will have built what is known as a STRIPS ladder (I’ll just call it a ladder from now on to avoid repetition).1 This particular ladder would pay $1 for 20 years, starting in 2021, ending in 2040. The cost of building such portfolio (which would be the cost of buying all those STRIPS) can be interpreted as the cost of buying a 20-year annuity paying $1. If you build the 20-year ladder and do nothing, after a year you will receive a payment and will own a 19-year ladder. If instead you take the payment and use it to buy a 20-year STRIPS with the same face value as the payment you just received, then you will have kept the 20-year length of your portfolio (that is, imagine you move the maturing STRIPS to the end of the ladder, thus “rolling it over”). Note that the 20-year STRIPS will cost less than the payment you received (as long as interest rates are positive) and therefore you will still have some money left. This money you reinvest in STRIPS with maturities 1 through 20 in such a way that you end up with the same face value at each maturity. This means that, after you’ve rolled over your ladder, your face value for each year will be more than $1 (maybe, let’s say $1.02). Another way of understanding the rollover, perhaps easier for the calculations, is that after one year you sell your 19-year ladder, and then turn around and use the proceeds (including the payment from the STRIPS that just matured) to buy a 20-year ladder. Note that if you do this, you’ve created a security that, essentially, behaves like a security that pays no dividends. 1 STRIPS ladders are the most common types of ladders, though you can find ladders built from risky corporate bonds. Ok, now that you know what a rolling STRIPS ladder is, let’s do some fun things with it. We will work with a 30 year rolling ladder (i.e., the first STRIPS matures in one year, the last one in 30 years, all the STRIPS have the same face value). I’ll call it ladder30 for short. When I refer to the face value of the ladder, I mean the face value of each STRIPS in the ladder. . Setup: (20 points) e. Calculate the price of a ladder30 with a face value of $1 on December of each year between 1985 through 2019. f. Calculate the Yield to Maturity and the duration of the ladder30 on December 1985, December 2004, and December 2019. g. Calculate the return an investor would have earned from holding a ladder30 each year from December 1985 to December 2019. h. Calculate the annual average return, volatility, and Sharpe ratio of investing in ladder30 between 1985 and 2019 i. Calculate ladder30’s beta. Analysis j. (10 pts) Based on what you know about market returns, how would you judge the performance of ladder30? During this period, was it better to invest in the market, or in ladder30? k. (10 pts) Given the link between share’s prices and interest rates (think of any of our valuation models) what can you say about what ladder30’s beta should be? Were you surprised by the result you obtained in point i? Why? l. (10 pts) Is the average from the last 30 years of returns from ladder30 a good predictor of what its returns will be during the next 30 years? (In other words, is the average return from the last 30 years a good proxy for the expected return for the next 30 years?) Why, or why not? Bonus: (10 points) What option prices tell us about expectations 1. What combination of options expiring on a given date (say third Friday of January, 2021) on the SPY will deliver the following payoffs: $1 if the SPY ends up being worth 2,800 or less, $0 if the SPY ends up being worth 2810 or more. The payoff if the SPY ends up being between 2,800 and 2,810 should change linearly from $1 to $0, so that the payoff if the SPY ends up, say, at 2,805, is $0.50. (And, for example, if the price of SPY end up at 2,802.5, the payoff is $0.75; if the price of SPY ends up at 2,807.5, the payoff is $0.25…you get the idea). 2. Find the cost of implementing such portfolio of options. (You can find data on options prices in many websites. For example, if you type “SPY option chain” in Google you’ll see several options…no pun intended.) 3. What is the market telling us about the probability that the SPY ends up below 2,800 on the third Friday of January, 2021 (or whatever date you chose for your options)?