Stockholm School of Economics

Advanced Investment Management-4106.

Andrei Simonov

 

 

Study Questions for The State of South Carolina (HBS 9-201-061) Case.

 

The purpose of a case is to make your hands dirty. While the analysis itself is quite straightforward, it allow you to familiarize yourself with different information sources. Here are a few pointers:

 

You may then organize and draft your results in whichever way you see fit. If you feel that you have to make any assumptions, please do it by stating them clearly in your report.  I expect the report to be no longer than 7 pages + Excel spreadsheets (if necessary). I would appreciate 12pt font.

Ibbotson data (total returns for tbills and corp. bonds) are HERE. (Updated: All MAJOR US ASSET CLASSES 1926-2005)

Dow-Jones Index web site   

The DMS Global Returns Data are (no longer available for download due to copyright issue) HERE

The DMS Global Returns Data

The DMS Global Returns Data are designed to measure the very long-run performance of stocks, bonds, bills, inflation, currencies, risk premia, and maturity premia in sixteen different countries around the globe since end-1899. The countries include the two main North American markets, namely, the United States and Canada, the United Kingdom, seven markets from what is now the Euro currency area, three other European markets, two Asia-Pacific markets, and one African market. Together, these countries made up 94 percent of the free float market capitalization of all world equities at start-2003, and it is estimated that they comprised over 90 percent by value at the start of the period in 1900.

To compile this database, the best quality indices and returns data available for each national market were assembled from previous studies and other sources. Where possible, data were taken from peer-reviewed academic research papers, or, alternatively, highly rated professional studies. For the United Kingdom, Dimson-Marsh-Staunton constructed their own indices, since hitherto there was no satisfactory record of long run equity returns. They also used archive data to construct indices for several other countries (e.g., Canada, Ireland, South Africa, Switzerland) for periods for which no indices were previously available. Full details of the data sources for all sixteen countries together with full citations are provided in Dimson, E, P R Marsh, and M Staunton, Triumph of the Optimists: 101 Years of Global Investment Returns, Princeton University Press, 2002, as updated in Dimson, E, P Marsh, and M Staunton, Global Investment Returns Yearbook 2003, ABN AMRO/London Business School.

To span the full period from 1900 onward typically involved linking more than one index series. The best available index is chosen for each period, switching when feasible to superior alternatives, as these become available. Other factors equal, security indices have been selected to provide the widest possible coverage of their market. The ideal here is full coverage, and in recent years, the DMS Global Indices meet or are close to this aspiration for several countries, including the United States and United Kingdom. For earlier years, fully comprehensive equity indices simply do not exist for most countries. The guiding principle underlying the DMS Global Indices has been to choose the best index with the broadest coverage from among the available series.

All the security returns in the DMS Global Database include reinvested gross (pre-tax) income as well as capital gains. All data series start at the end of December 1899, and this common start-date aids international comparisons. Equity indices that suffer from survivorship or success bias have been avoided. All DMS Global index returns are computed as the arithmetic average of the individual security returns, and not as geometric averages (an inappropriate method encountered in certain older indices). Virtually all the equity index series used are capitalization weighted, although for earlier periods in a couple of countries, the only available indices were equally weighted. 

The DMS Global Inflation rates are derived from the consumer price indices for each country, although for one or two early subperiods in a couple of countries, the wholesale price index is employed.

The DMS Global Exchange rates are year-end rates, and where there is a choice, market rather than official rates have been used. The primary source is The Financial Times for 1907-2002 and The Investors’ Review for 1899-1906.

The DMS Global Bill Returns are in general Treasury bill returns, although these instruments have not always existed in every country covered. When this is the case, the closest equivalent has been used, namely, a measure of the short-term interest rate, with minimal credit risk.

The DMS Global Bond Indices are based on Government bonds. The Bond Indices are usually equally weighted, with constituents chosen to fall within the desired maturity range. For the United States and United Kingdom, the Bond Indices are designed to have a maturity of twenty years, although from 1900-55, the UK Bond Index is based on perpetuals, since there were no twenty-year bonds in 1900, and perpetuals dominated the market in terms of liquidity until 1955. For all other countries, twenty-year bonds are targeted, but where these are not available, either perpetuals (usually for earlier periods) or shorter maturity bonds are used.

The DMS Global Returns indices are provided in both nominal and real terms. For most purposes, we recommend that users focus on the REAL or the USD series. Otherwise, the very high inflation rates in a number of countries (eg, Germany) during the first half of the twentieth century mean that the nominal returns can be exceedingly high. Similarly, we recommend that users focus on the Exchange Rate REAL series, rather than the Exchange Rate series.

 

Downloading Data From REUTERS

(credit due: A. Bodnaruk, finab@hhs.se, #9147)

 

1. Login to Reuters 3000 Xtra by following this link:

 https://3000xtra.glbl1.reuters.com/asp/login.asp?NFuse_logoutId=On

or by clicking on a “3000 Xtra login” shortcut on the desktop in the room 666.

Login: andrei.simonov@hhs.se

Password: Camus2004

 Please note that login name and password are case sensitive and once you type it incorrectly three times there would be an automatic change of the password which you would not be unable to obtain immediately. So be careful!

 2. On the left side of the screen you will see Applications – pick up the 3000 Xtra 451. It may take a few minutes for the software to download.

3. Once you get to the Reuters 3000 Xtra on the top of your screen you would see a “Get Going” button. Just to the left of it you would find a button which activates PowerPlus Pro, a Reuters-enhanced Excel. Click on it and then open a new workbook.

4. In order to download data you need to know variables’ RIC code: go to Reuters – Find Reuters data. There you would be presented with a window which allows you to search for the data you need:

 For example: in a “look for” choose “economic indicators” where country name begins with “united states”. You would be given all available economic indicators for the United States. Yield on the 1-year US Treasuries has RIC code aUSBOND1Y. By hitting “send” button you can copy this id-code to Excel.

 Please note that some of the fixed-income securities, e.g. yield on the Treasury bonds, you would find in economic indicators rather than in fixed income.

 5. After obtaining security RIC code you are ready to down load the time-series of security’s data. It is very unfortunate, but, at least to my knowledge, it is not possible to download the time-series data for more than one instrument at a time.

 Note: RIC-codes for some securities do not always work smoothly. Therefore, sometimes you have to put / before them, i.e. /t instead of t for AT&T.

 a)  For a time – series of security prices/yields go to Reuters – Assistants – Time series data. Put a RIC-code in the “code” window and hit “add” and “next”. You would be presented with the available data for this type of security. Be careful as for some securities (e.g. fixed income) frequency of the data should chosen already at this stage, while for equities you would chose frequency of the data later on. Chose the period (or number of the observations) over which you want to download data and that’s basically it (you can also decide whether you want your data to be presented in ascending or descending order and its format – this should be of no relevance for you).

b) Data on the number of shares outstanding which you would need to calculate the market cap can be found at Reuters – Assistants – Security History. Please note that the data on the number of shares outstanding is not available on the monthly basis, but only for the dates when this variable has been modified, i.e. when the new issue of equity has been made. You would need to take that into account when calculating the market cap.