The purpose of this exercise is to learn how to calculate stock returns for portfolio models using actual stock price data. Ten years worth of stock price data are included in the file StockReturns for Apple Computer (AAPL), Advanced Micro Devices (AMD), and Oracle Corporation (ORCL). These data contain closing prices that are adjusted for stock dividends and splits.
Using these stock price data, we now want to calculate the annual returns for each stock for the Years 1 through 9. 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 + pi,t eri,t
where pi,t is the price of stock i in period t and ri,t 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 for the years included here. Solving the equation pi,t+1 = pi,t er it for the return on stock i in period t gives
ri,t = ln (pi,t+1 / pi,t)
For example, the Apple Computer adjusted closing price in Year 9 was 38.45. The closing price in Year 10 was 75.51. Thus, the continuously compounded return for Apple Computer from Year 9 to Year 10 is
ln (75.51 / 38.45) = 0.6749
We use this calculation as our estimate of the annual return for Apple Computer for Year 9.
Take the closing stock prices shown in Figure 8.15 and calculate the annual returns for Years 1 through 9 for AAPL, AMD, and ORCL using ri,t = ln(pi,t+1 / pi,t). If you calculate the returns properly, your results should appear as in the final three columns of Figure 8.15.

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FIGURE 8.15 YEARLY RETURNS FOR AAPL, AMD, AND ORCL AAPL Year Adj. Close Adj. Close Adj. Close Return 0.0962 0.8104 0.9236 0.8753 0.1340 -0.5432 0.4517 1.2263 0.6749 AAPL AMD ORCL ORCL Ret Return -0.5537-0.1074 0.1272 0.8666 0.4506 0.9956 0.3124 0.1533 -0.4270-0.5230 1.1194 -0.3610 1.0424 0.1416 0.0613-0.0065 0.9729 -0.0912 AMD 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 5.24 14.86 15.8 41.8 4.32 3.88 9.23 24.98 29.12 17.26 12.03 13.86 13.77 12.57 4 10 Data Source: CSI Web site: www.csidata.com