Spreadsheet 1
Lets get some practice using spreadsheets to calculate some basic risk/return portfolio calculations.
The data and answers are is on the class web page under "Spreadsheet_ HW1_answer"
The data is in an excel spreadsheet file. Each column contains yearly data from 1926 to 1997. The data
includes annual returns to large stocks, small stocks, bonds, inflation, and a column that list the party
affiliation of the president for that year.
Your mission is to perform the following calculations:
1. Find the arithmetic average and standard deviation of yearly returns for each of the assets over the entire
period (columns B through G).
2. Calculate the Sharpe ratio for each asset in columns B through F. The Sharpe ratio is defined as the
arithmetic average in excess of the treasury bill rate all divided by the standard deviation of the arithmetic
average. Which asset has the greatest reward per unit of risk? Which asset has the least reward per unit of
risk?
3. What is the average risk premium on the portfolio of large company stocks? Small company stocks?
4. Make a histogram of yearly returns for column C and column E. Using ocular statistics (e.g., visual
examination), which distribution looks the most risky? the least risky? Does this correspond to your
calculations from question 1?
5. Construct an equally weighted index of the data in columns C, D , and E. Find the mean and standard
deviation of this index. Is the mean of the index equal to the average of the means of the component assets?
Is the standard deviation of the index equal to the average of the standard deviations of the component
assets? Why or why not?
6. Calculate the correlations among all of the assets. Which two assets have the highest (lowest)
correlations. What are the highest and lowest correlation values ?
7. What is the average return to large company stocks during Republican administrations? Democratic
administrations? Is this difference statistically significant? Why is there a difference?