FTS Case 1: Understanding Risk and Return
1. Explain return as a reward for postponed consumprion when agents with different interemporal
choice exist:
a. Risk free rate and inflation
b. Nominal and real return
2. Explain risk of expected future cash flows (examples of its origin). Explain rational economic agent’s
utility for return and risk.
3. Calculate the daily returns on each stock and the portfolio, then calculate average and volatility.
Calculate annual average return on each stock and the portfolio (256 day/annual).
4. Calculate HPR/HPY of each stock and the portfolio (10 days); based on the latter calculate annual
HPR/HPY(256). Please provide formulas in the report.
5. Plot the daily returns of the two stocks and the portfolio on a graph. Discuss the intuition of risk on
the graph and your expectations of the appearance of the plot according to financial theory/ Do you
observe something different or it complies with theory?
6. Make a plot for each stock with expectation (your first day record) and realization (calculations in #3)
of risk and return (risk on the x-axis, return on the y-axis). Do realizations differ from expectation
now? Why?