Development Modeling and Risk Analysis

P(GAIN), LLC TO: RISK ASSIGNMENT RECIPIENTS FROM: ROGER STAIGER SUBJECT: RISK QUANTIFICATION ASSIGNMENT DATE: N/A CC: NONE For the three main U.S. Asset Classes: (1) Equities, (2) Fixed Income Securities, and (3) Real Estate quantify the return, risk, and correlation matrix across three different timelines: (1) 5-year, (2) 10-year, and (3) 15-year. Please note that finding the data (which is all available publicly over the internet for free) is a large part of this assignment. Also, residential data only can be used at the proxy for all real estate. The following two tables are required to be completed for each time period, i.e. 5-, 10-, and 15years. The first is a summary table of each period’s return, risk, efficiency, and P(Loss). The second, correlation matrix, will be required for each time period (three in total). It is recommended that the analysis be year-over-year returns calculated on a monthly basis, i.e. Holding Period Returns on a monthly basis. The assignment must be written and presented in memorandum format. Return/Risk/Efficiency Summary (Three (one for each Asset class) needed in total): Year Return Risk CV P(Gain) Equity Fixed Income Real Estate Correlation Matrix (Three needed in total/one for each time period): Year Equity Equity Fixed Income Real Estate N/A N/A 1.00 Fixed Income ### Real Estate ### 1.00 ### Need to complete (###) and need Correlation matrix for each time period Memo_Risk_Assignment (current) N/A 1.00 Hints: 1. Start with pulling the raw data, monthly values. Use Adjusted close values (these adjust for dividends, coupons, etc.) 2. Raw Data a. Equity – S&P500 b. Fixed Income – VBMFX c. Real Estate – Case-Shiller Comp-10 3. Finding Data a. This is a large part of the assignment 4. Calculate Holding Period Returns (HPR) (After monthly raw data is in your possession in MS Excel format) a. Example: i. Jan10’/Jan09’ – 1 (Year-over-Year return for Jan10’) ii. This is ONE data point b. Transform the raw data to Holding Period Returns c. Note: You will need 72 pieces of raw data to produce 60 HPRs 5. Calculate 5-, 10- and 15-year average returns for each asset class 6. Calculate 5-, 10- and 15-year standard deviations for each asset class 7. Calculate 5-, 10- and 15-year Coefficient of Variation (CV) 8. Calculate 5-, 10- and 15-year P(Gain) (Hint: See Return of Capital Memorandum) 9. Calculate the 5-, 10- and 15-year correlation matrices for the asset classes Please note: this is a very important assignment. Not from a grade perspective (5.00%) but from a conceptual understanding of return and risk. We will discuss further in class. 2

Development Modeling and Risk Analysis

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