FIN 5309 Homework 5

Fall 2018
Due Oct 25, 2018

1. The following table gives annual, end of year prices of a bond

Year Bond value

2006 36.9
2007 39.8
2008 42.4
2009 38.1
2010 36.4
2011 39.2
2012 44.6
2013 45.1

(a) Calculate the annual simple returns

(b) Calculate the annual continuously compounded returns

2. (R application) Consider the daily stock returns of American Express (AXP),

Caterpillar (CAT), and Starbucks (SBUX) from January 1999 to December 2008. The
data are simple returns given in the file d-3stocks9908.txt (date, axp, cat, sbux).
(a) Express the simple returns in percentages. Compute the sample mean, standard
deviation, skewness, excess kurtosis, minimum, and maximum of the percentage
simple returns.
(b) Transform the simple returns to log returns.
(c) Express the log returns in percentages. Compute the sample mean, standard
deviation, skewness, excess kurtosis, minimum, and maximum of the percentage log
returns.
(d) Test the null hypothesis that the mean of the log returns of each stock is zero. That
is, perform three separate tests. Use 5% significance level to draw your conclusion.

3. (R application) Consider the daily log returns of American Express stock from
January 1999 to December 2008 as in Problem 2. Use the 5% significance level to
perform the following tests:
(a) Test the null hypothesis that the skewness measure of the returns is zero.
(b) Test the null hypothesis that the excess kurtosis of the returns is zero.

4. Consider the following data:

x 0 2 4 6 8
y 0 1 2 3 4
 Calculate the correlation coefficient between variables x and y. What does this mean?

5. (R application) Consider the monthly simple returns for the stock of Exxon-Mobil
(tick symbol XOM) and the S&P 500 composite index from January 1980 to
December 2010. The returns include dividend distributions, and the data file is m-
xomsp-8010.txt. Transform the two simple returns to log returns and express the log
returns in percentages.
a) Compute the sample mean, standard deviation, skewness, excess kurtosis,
minimum, and maximum of each percentage log return series.
b) Based on the summary statistics, is there any difference between individual stock
returns and the returns of the market index?
c) Compute the correlation coefficient between the two log return series.