The purpose of this exercise is to learn how to calculate stock returns for portfolio models using actual stock price data. First, it is necessary to obtain stock price data. One source (of many) is Yahoo! Go to the link finance.yahoo.com and type in a ticker symbol such as AAPL (for Apple Computer). Then, on the left-hand side of the page, select Historical Data.

These data are easily downloaded to a spreadsheet by clicking on the link “Download to Spreadsheet” at the bottom of the page. For Apple Computer (AAPL), Advanced Micro Devices (AMD), and Oracle Corporation (ORCL), download the monthly price data for January 1997 through January 2006. These data contain closing prices that are adjusted for stock dividends and splits.

You now have stock prices for 10 years, and the objective is to calculate the annual returns for each stock for the years 1997 through 2005. Returns are often calculated using continuous compounding. If the stock prices are adjusted for splits and stock dividends, then the price of stock i in period t + 1, Pi,t +1, is given by

pi,t+1 = pt erit

Where pi, t is the price of stock i in period t and rit is the return on stock i in period t. This calculation assumes no cash dividends were paid, which is true of Apple Computer, Advanced Micro Devices, and Oracle Corporation. Solving the equation pi,t+1 = pt erit for the return on stock i in period t gives

rit = ln (pi,t+1/pt)

For example, the Apple Computer adjusted closing price in January 2005 was 38.45. The closing price in January 2006 was 75.51. Thus, the continuously compounded return for Apple Computer from January 2005 to January 2006 is

ln(75.51/38.45) = 0.6749064

We use this calculation as our estimate of the annual return for Apple Computer for the year 2005.

Take the closing stock prices that you have downloaded and calculate the annual returns for 1997 through 2005 for AAPL, AMD, and ORCL using rit = ln (pi,t+1/pt). If you calculate the returns properly, your results should appear as in Figure.

FIGURE

YEARLY RETURNS FOR AAPL, AMD, ANDORCL

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AAPL ORCL ORCL Date Adj. Close Adj. Close Adj. Close Retur Retur Return 4.32 3.88 9.23 24.98 29.12 17.26 12.03 13.86 13.77 12.57 AMD AAPL AMD 2-Jan-97 2-Jan-98 4-Jan-99 3-Jan-00 2-Jan-01 2-Jan-02 2-Jan-03 2-Jan-04 3-Jan-05 3-Jan-06 4.16 4.58 10.3 25.94 10.81 12.36 7.18 11.28 38.45 75.51 17.57 10.1 11.47 18 24.6 16.05 0.0962 0.8104 0.9236 0.8753 0.1340 0.5432 0.4517 1.2263 0.6749 -0.5537 -0.1074 0.1272 0.8666 0.4506 0.9956 0.3124 0.1533 -0.42700.5230 -1.1194-0.3610 1.0424 0.1416 0.0613 -0.0065 0.9729 0.0912 5.24 14.86 15.8 41.8 Data Source: CSI Web site: http://www.csidata.conm