Stocks, Bonds, and Cash
The C Section of the Wall Street Journal is largely concerned with how investors are allocating their portfolios among stocks, bonds, and cash. The latter is short-term securities paying interest with very low default risk. 90-day Treasury bills are a good example of cash.
Issues. Your goal is to study five issues.
1. Evaluate the risk and return of investing in the stocks, Treasury bonds, and Treasury bills. You should consider both nominal returns and real returns (adjusted for inflation).
2. Evaluate the extent to which returns in these markets are correlated, implying that sophisticated portfolio optimization is possible.
3. Determine how these markets are affected by business cycles as measured by changes in real gross domestic product.
4. Determine how changes in these markets affect physical investment and, hence, business cycles.
5. Assess the extent to which the relationships in 1-4 are stable over time. Identify any interesting subperiods, including a discussion of why particular subperiods might be of interest. Ultimately, this is a very important issue for investors so you should devote half your efforts on this project to it.
Data is available here for the years 1929-2002. Security values are end-of-year. The other numbers are annual aggregates.
tbill - index for the Treasury bill market, including interest payments and changes in security values.
tbond - index for the Treasury bond market, including interest payments and changes in security values.
sp500 - index for the Standard and Poor's 500, including dividend payments and changes in security values.
cpi - the consumer price index.
gdp - gross domestic product.
inv - physical investment.
year - year.
You will want to calculate percentage changes over time. For a variable x, Stata uses l.x to denote the first lag (last year's value). Stata uses d.x to denote x - l.x, or the change since last period, which is also known as the first difference. (The general format is l1.x, l2.x, l3.x for the first, second, and third lags.) The first character in a lag is an "ell". The percentage change in x is thus d.x/l.x.
Do File. Some useful variables are calculated in this do file.
References:
Global Financial Data, Inc. (see Sample Data)
Posted by bparke at October 13, 2003 09:37 PM