5. (IPO ETE. Buy-and-hold return and Performance) The HW 04 EXCEL data file contains the adjusted closing prices of FPX and SPY. We can calculate FPX's buy-and-hold returns (BHR) using daily return compounding and compare the stock performance to that of SPY. We define daily return Ri-[P(2007-01-03)-P(2006-12-29)1P(2006-12-29) and R [P(2007-01-04)-P(2007-01-03)yP(2007-01-03), where P(date) is the adjusted closing price on a specific day. Subsequent daily reruns can be similarly calculated. (a) Calculate the annual returns (%, 2 decimal places; each calendar year) for both FPX and SPY from 2007 to 2013 (b) In part (a), calculate the geometric average rate of return (annual, %) for both FPX and SPY (c) Calculate the long-run (7 year) buy-and-hold return (BHR, %, 2 decimal places) for both FPX and SPY from the beginning of 2007 to the end of 2013 (d) In part (c), calculate the performance differential (%) between FPX and SPY using SPY as benchmark. Calendar Annual Annual return of SPY (90 Year return of FPX (% 2007 2013 Background: Professor Chen and his co-authors find that adding a value-weighted (i.e., large IPO stocks gain more weights than small ones) IPO portfolio does lead to a statistically and economically significant enlargement of the investment opportunity set for investors relative to investing solely in a set ofbenchmark portfolios. IPOs associated with prestigious lead underwriters (i.e., well-known investment banking firms such as Goldman Sachs, Morgan Stanley...) are the main sources of this augmentation of the mean-variance investment opportunity set. Their studies imply that issuing IPO exchange traded funds or similar products can provide diversification gains to investors. Inspired by their studies, let's compare the performance of an IPO ETF (FPX) with that of SPY. Also, for your information, another IPO ETF (Renaissance IPO ETF; ticker symbol: IPO) began trading in October 2013 References Chen, H., Ho, K., Hsiao, Y., and Wu, C. (2010) "The Diversification Effects of Initial Public Offerings" l of Business, Finance, and Accounting, Vol. 37, No. 1 &2, pp. 171-205 Chen, H. and Ho, K. (2009) "Do IPO Index Portfolios Improve the Investment Opportunities for Mean- Variance Investors?" Finance Research Letters, Vol 6, No. 3, pp. 159-170. p24201 014 5. (IPO ETE. Buy-and-hold return and Performance) The HW 04 EXCEL data file contains the adjusted closing prices of FPX and SPY. We can calculate FPX's buy-and-hold returns (BHR) using daily return compounding and compare the stock performance to that of SPY. We define daily return Ri-[P(2007-01-03)-P(2006-12-29)1P(2006-12-29) and R [P(2007-01-04)-P(2007-01-03)yP(2007-01-03), where P(date) is the adjusted closing price on a specific day. Subsequent daily reruns can be similarly calculated. (a) Calculate the annual returns (%, 2 decimal places; each calendar year) for both FPX and SPY from 2007 to 2013 (b) In part (a), calculate the geometric average rate of return (annual, %) for both FPX and SPY (c) Calculate the long-run (7 year) buy-and-hold return (BHR, %, 2 decimal places) for both FPX and SPY from the beginning of 2007 to the end of 2013 (d) In part (c), calculate the performance differential (%) between FPX and SPY using SPY as benchmark. Calendar Annual Annual return of SPY (90 Year return of FPX (% 2007 2013 Background: Professor Chen and his co-authors find that adding a value-weighted (i.e., large IPO stocks gain more weights than small ones) IPO portfolio does lead to a statistically and economically significant enlargement of the investment opportunity set for investors relative to investing solely in a set ofbenchmark portfolios. IPOs associated with prestigious lead underwriters (i.e., well-known investment banking firms such as Goldman Sachs, Morgan Stanley...) are the main sources of this augmentation of the mean-variance investment opportunity set. Their studies imply that issuing IPO exchange traded funds or similar products can provide diversification gains to investors. Inspired by their studies, let's compare the performance of an IPO ETF (FPX) with that of SPY. Also, for your information, another IPO ETF (Renaissance IPO ETF; ticker symbol: IPO) began trading in October 2013 References Chen, H., Ho, K., Hsiao, Y., and Wu, C. (2010) "The Diversification Effects of Initial Public Offerings" l of Business, Finance, and Accounting, Vol. 37, No. 1 &2, pp. 171-205 Chen, H. and Ho, K. (2009) "Do IPO Index Portfolios Improve the Investment Opportunities for Mean- Variance Investors?" Finance Research Letters, Vol 6, No. 3, pp. 159-170. p24201 014
