The attached spreadsheet PS2 data (see photo) contains the time series of monthly market capitalization and return
Question:
The attached spreadsheet "PS2 data" (see photo) contains the time series of monthly market capitalization and return of the S& P 500 Stock Index and the S&P 500 Investment Grade bond Index.
[a] What are your estimates of the annualized expected return and volatility of each index? (5pt)
[b] Calculate the time-series monthly returns of the following three strategies (5pt):
- A market-value-weighted portfolio of the stock and bond index.
- A risk-parity strategy based on your answer in a.
- A 60% stock and 40% bond rule-of-thumb strategy.
[c] What is your estimate of the Sharpe ratio of each strategy during the sample period, assuming that the risk-free rate is 1%? (5pt)
[d] Compare the performance of the three strategies during the early stage of the covid crisis in March 2020, what is the difference? explain why there is the difference. (5pt)
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen