1.Use the data in the worksheet of the spreadsheet Chapter 04 Questions.xls and the Excel spreadsheet developed...
Question:
1.Use the data in the worksheet of the spreadsheet Chapter 04 Questions.xls and the Excel spreadsheet developed in the James–Stein estimator outbox to
a. Calculate estimates for the countries listed.
b. Repeat estimating the James Stein estimators to get JS estimates excluding Argentina and Brazil. [In cells B3, B4, and B6, change the range from B12:Y12 to D12:Y12.]
c. Compare the data, statistics, and results for Argentina and Brazil with those of the other countries. What is different about these two countries? What do you know about them that might explain this difference? Assuming you need to include these two countries, what might you do to ensure that they do not skew the JS results for the other markets?
d. Using Excel’s chart wizard, create a chart that shows the JS estimate of alphas with and without Argentina and Brazil for each market along with its sample mean.
2. Apply the spreadsheet developed in the James–Stein estimator outbox to the period 1985–2008. What is unusual about the asset class returns for this period? Describe the impact of applying the James–Stein method. Does it result in more realistic expectations of future returns?
3. Using the data in Problem 1, apply the implied views method to compute expected returns (μ) for the 24 equity markets using an equally weighted target portfolio and setting the expected returns for the United States and Mexico equal to their James–Stein estimates from Problem 1(b).
Business Analytics Methods Models and Decisions
ISBN: 978-0321997821
2nd edition
Authors: James R. Evans