Efficient frontiers revisited

• I will show you how to construct the efficient frontiers for Report 4.
• PLEASE ADD AXES TITLES TO THE GRAPHS !
The story so far
• The S&P 500 is a good measure of the “ overall market” • Know the basics of how this index is computed (Chpt 8) • The shares in an individual company reflect two forces • Trends in the overall market • Idiosyncratic events that impact only that firm • The idiosyncratic risks can be diversified in a broad portfolio of stocks, so they should not have a big impact on the rate of return expected by investors who hold the stock. • The stock’s beta measures this. • A simple rule of return to find this expected realreturn is the inverse of the P/E ratio.
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1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014
Comparison of monthly S&P 500 and IBM stock price
IBM Level of the S&P 500 Index
CPI IBM Stock S&P 500 1/31/1957 27.7 1.4 44.7 7/31/2014 237.9 191.7 1930.7
Review Use this data to find the nominal and real rate of change for IBM stock and S&P 500 over this period, using both annual and continuous compounding. NOTE THE DATES! Write the value of IBM stock in real terms (2014 dollars) in 1957 and 2014.
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1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014
Comparison of monthly S&P 500 and IBM stock price
IBM Level of the S&P 500 Index
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1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014
Comparison of S&P 500 and IBM stock price
IBM Level of the S&P 500 Index
Rest of this week
• We will continue to consider how the broader economy influences the overall performance of the market, as measured by the S&P 500 index. • Inflation • business cycles • and other shocks (world events, politics, etc.) as elaborated in chpts14, 15 and 16 • After the midterm next Wednesday, we will focus more on individual stock movements, but continue to explore the market and the larger economy.

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