Question 1
Problem Set 2 Finance 325: Corpor Professor Finance rate ine abers of mem the group on Led by Due Wednesday, October 4, beginning of class. Please turn in one hard copy set of answers per group, th the names of at the front page. when two people, Bob and Greta, who never die. There are only Each tree produces 100 fruit in a normal 1. Suppose we have a we two assets in the entire economy, an apple tree owned by Bob and an apple tree own just like Bob and Greta, the trees live yearGreta is a better farmer than Bob, and because of this she is able to get a high there is a drought in a drought year, Bob's apple production drops by 40% while Greta's apple production drops by only 10%. Every year there is a 20% chance of a drought, and the Whelihood of a drought is uncorrelated across year What assets comprise the market portfolio? b. and Bob have the same preferences. Specifically, both Greta and Bob are equally Both Greta happy eating N apples today or eating 11N apples next year, whether it's a normal year or a drought year, what is their discount rate for apples? (Hint: this is simple; you don't have to do any math.) Are Greta and Bob risk averse? CToday is t0. What is the present value today of the perpetual stream of apples excluding todays harvest (ie , starting at t=1) that Greta's tree produces? What about for Bobs tree? (Note: there is no currency in this economy, only apples. Thus all values in this economy are in units of apples.) ? A normal year? (Remember, d. What is the present value today of the market portfolio excluding today's harvest? what is the return on Bob's tree D+)/P, where prices exclude the current period returns are (1+ r;+1) = (P, +1 T. What is the return on Greta's tree if next year is a drought year? A normal year What is the return on the market if next year is a drought year? A normal year? What's the expected market return? h. Rememberthe beta of an asset is the expected % change in its return given a 1% change the return of the market portfolio. What is the beta of Bobs tree? What is the beta of Greta's tree? 2. Download daily stock price data for the consulting firm Accenture (ticker ACN) and for the S! 500 index for the period January 1, 2010 to December 31, 2010. a. Estimate the equity beta for Accenture using this year of data by running a regressi Excel. Also report the standard error for beta b. On May 6, 2010 there was a "flash crash:" around 2:45pm, the Dow Jones Industri Average dropped about 9% in seconds before recovering minutes later (see http://goo.glIC2VKX for details). Some stocks, such as Accenture, traded at levels Problem Set 2 Finance 325: Corpor Professor Finance rate ine abers of mem the group on Led by Due Wednesday, October 4, beginning of class. Please turn in one hard copy set of answers per group, th the names of at the front page. when two people, Bob and Greta, who never die. There are only Each tree produces 100 fruit in a normal 1. Suppose we have a we two assets in the entire economy, an apple tree owned by Bob and an apple tree own just like Bob and Greta, the trees live yearGreta is a better farmer than Bob, and because of this she is able to get a high there is a drought in a drought year, Bob's apple production drops by 40% while Greta's apple production drops by only 10%. Every year there is a 20% chance of a drought, and the Whelihood of a drought is uncorrelated across year What assets comprise the market portfolio? b. and Bob have the same preferences. Specifically, both Greta and Bob are equally Both Greta happy eating N apples today or eating 11N apples next year, whether it's a normal year or a drought year, what is their discount rate for apples? (Hint: this is simple; you don't have to do any math.) Are Greta and Bob risk averse? CToday is t0. What is the present value today of the perpetual stream of apples excluding todays harvest (ie , starting at t=1) that Greta's tree produces? What about for Bobs tree? (Note: there is no currency in this economy, only apples. Thus all values in this economy are in units of apples.) ? A normal year? (Remember, d. What is the present value today of the market portfolio excluding today's harvest? what is the return on Bob's tree D+)/P, where prices exclude the current period returns are (1+ r;+1) = (P, +1 T. What is the return on Greta's tree if next year is a drought year? A normal year What is the return on the market if next year is a drought year? A normal year? What's the expected market return? h. Rememberthe beta of an asset is the expected % change in its return given a 1% change the return of the market portfolio. What is the beta of Bobs tree? What is the beta of Greta's tree? 2. Download daily stock price data for the consulting firm Accenture (ticker ACN) and for the S! 500 index for the period January 1, 2010 to December 31, 2010. a. Estimate the equity beta for Accenture using this year of data by running a regressi Excel. Also report the standard error for beta b. On May 6, 2010 there was a "flash crash:" around 2:45pm, the Dow Jones Industri Average dropped about 9% in seconds before recovering minutes later (see http://goo.glIC2VKX for details). Some stocks, such as Accenture, traded at levels
