Risk Free Monthly 0.

005

Trad Sample Matrix

0 1 2 3 Mean Return Er-C
0 0.00493182 0.003244 0.002792 0.001524 0.0002590 -0.00474
1 0.00324408 0.003358 0.003097 0.001404 0.0025759 -0.00242
2 0.00279229 0.003097 0.006648 0.000896 -0.0030549 -0.00805
3 0.00152385 0.001404 0.000896 0.002344 0.0049522 -0.00005

Tangency at c=0.5
Port Return -0.0163787
Port Sd 0.17472573
Theta -0.1219656

Constant Correl 0 1 2 3 std matrix 0

0 1 0.797152 0.487659 0.44822 0 0.004932
1 0.79715208 1 0.655468 0.500483 1 0.00407
2 0.48765893 0.655468 1 0.227085 2 0.005726
3 0.44822018 0.500483 0.227085 1 3 0.0034

average corre0.519344

Constant Corr Matrix 0 1 2 3 Mean Return Er-C

0 0.00493182 0.002114 0.002974 0.001766 0.0002590 -0.00474
1 0.00211351 0.003358 0.002454 0.001457 0.0025759 -0.00242
2 0.00297372 0.002454 0.006648 0.00205 -0.0030549 -0.00805
3 0.00176566 0.001457 0.00205 0.002344 0.0049522 -0.00005

Port Return 6.381E-06

Port Sd 0.32607233
Theta -0.0153145
 Weights Weights c= 0.5
-1.576214 -0.8697195 -1.541371 2.201099
2.625227 1.44854112 2.0832 -2.974839
-1.29846 -0.716461 -1.580316 2.256714
2.061772 1.13763939 0.338213 -0.482973

1 1

1 2 3 corr 0 1 2 3
0.00407 0.00572591 0.0034 0 1 0.519344 0.519344 0.519344
0.003358 0.00472484 0.002805 1 0.519344 1 0.519344 0.519344
0.004725 0.00664786 0.003947 2 0.519344 0.519344 1 0.519344
0.002805 0.00394719 0.002344 3 0.519344 0.519344 0.519344 1

Weights
-0.742221 1.9788284
0.022438 -0.0598219
-1.437483 3.8324600
1.782184 -4.7514664
1
 CL CH
S0 100 S0 100
X 100 X 125
Time 0.50 Time 0.50
rF 5% rF 5%
Sigma 30% Sigma 30%
Mu 15% Mu 15%

Initial $100 Initial investment

Week Stock CL CL CL CL CL CH CH CH
No. Price d1 d2 Nd1 Nd2 Price d1 d2 Nd1
0 100.0000 0.2239 0.0118 0.58859 0.50470 9.63488 -0.82799 -1.04012 0.2038
1 95.1007 -0.0219 -0.2299 0.49125 0.40907 6.78317 -1.09467 -1.30268 0.1368
2 92.7471 -0.1543 -0.3581 0.43869 0.36013 5.49543 -1.24916 -1.45297 0.1058
3 96.6162 0.0381 -0.1614 0.51518 0.43587 7.14149 -1.08034 -1.27986 0.1400
4 96.1708 0.0059 -0.1892 0.50235 0.42495 6.70577 -1.13766 -1.33279 0.1276
5 89.9214 -0.3560 -0.5466 0.36092 0.29231 3.80769 -1.52645 -1.71710 0.0634
6 87.0040 -0.5519 -0.7379 0.29052 0.23028 2.68681 -1.75124 -1.93729 0.0400
7 84.7259 -0.7226 -0.9039 0.23496 0.18301 1.93743 -1.95312 -2.13446 0.0254
8 86.3626 -0.6444 -0.8209 0.25967 0.20586 2.19291 -1.90859 -2.08510 0.0282
9 83.7864 -0.8502 -1.0218 0.19760 0.15345 1.46018 -2.15112 -2.32265 0.0157
10 82.3135 -0.9940 -1.1604 0.16012 0.12295 1.07293 -2.33488 -2.50129 0.0098
11 84.0270 -0.9100 -1.0711 0.18141 0.14205 1.24122 -2.29493 -2.45605 0.0109
12 81.3914 -1.1584 -1.3141 0.12334 0.09441 0.72464 -2.59194 -2.74760 0.0048
13 83.0369 -1.0809 -1.2309 0.13987 0.10918 0.83205 -2.56852 -2.71852 0.0051
14 89.6749 -0.6041 -0.7482 0.27290 0.22717 2.01536 -2.15244 -2.29655 0.0157
15 94.3971 -0.2722 -0.4102 0.39272 0.34082 3.34788 -1.88945 -2.02743 0.0294
16 95.6980 -0.1954 -0.3269 0.42255 0.37186 3.60712 -1.89153 -2.02308 0.0293
17 98.0119 -0.0292 -0.1540 0.48837 0.43882 4.36227 -1.81706 -1.94187 0.0346
18 93.0876 -0.4845 -0.6022 0.31401 0.27352 2.08750 -2.38088 -2.49855 0.0086
19 100.4390 0.1560 0.0459 0.56198 0.51831 4.96105 -1.87131 -1.98138 0.0307
20 99.2818 0.0368 -0.0651 0.51469 0.47406 3.96631 -2.15289 -2.25479 0.0157
21 90.8386 -0.9347 -1.0277 0.17497 0.15204 0.76315 -3.33341 -3.42644 0.0004
22 90.2811 -1.1410 -1.2242 0.12694 0.11044 0.45848 -3.82281 -3.90602 0.0001
23 95.0198 -0.6329 -0.7049 0.26341 0.24042 1.05560 -3.72962 -3.80167 0.0001
24 99.6587 0.0040 -0.0548 0.50159 0.47813 2.26674 -3.78872 -3.84755 0.0001
25 96.6588 -0.7729 -0.8145 0.21978 0.20767 0.49682 -6.13663 -6.17823 0.0000
 Portfolio Insurance Sim
100
90
80
70
Portfolio Value

60
50
40
30
20
10
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Week No

Portfolio Value Stock

 St = St-1EXP[m*Dt + s*SQRT(Dt)*Z]

At the Beginning of Week At the End of Week

CH CH Omaga Portfolio Value Stock Portfolio Value
Nd2 Price w Total Stocks Bonds Price Stocks Bonds Total
0.1491 2.20140 2.8600 100.00 286.00 -186.00 95.101 271.99 -186.18 85.81
0.0963 1.25602 1.8630 85.81 159.86 -74.05 92.747 155.90 -74.12 81.78
0.0731 0.88194 1.4244 81.78 116.49 -34.71 96.616 121.35 -34.74 86.61
0.1003 1.26287 2.1310 86.61 184.56 -97.95 96.171 183.71 -98.04 85.66
0.0913 1.10080 2.0199 85.66 173.03 -87.36 89.921 161.78 -87.45 74.33
0.0430 0.44022 0.9008 74.33 66.96 7.38 87.004 64.79 7.38 72.17
0.0264 0.24440 0.5324 72.17 38.43 33.74 84.726 37.42 33.78 71.20
0.0164 0.13907 0.3193 71.20 22.73 48.46 86.363 23.17 48.51 71.68
0.0185 0.15520 0.4074 71.68 29.20 42.48 83.786 28.33 42.52 70.85
0.0101 0.07634 0.2109 70.85 14.94 55.91 82.314 14.68 55.96 70.64
0.0062 0.04302 0.1275 70.64 9.00 61.64 84.027 9.19 61.70 70.89
0.0070 0.04788 0.1710 70.89 12.12 58.77 81.391 11.74 58.82 70.57
0.0030 0.01820 0.0682 70.57 4.81 65.75 83.037 4.91 65.82 70.73
0.0033 0.01929 0.0910 70.73 6.43 64.29 89.675 6.95 64.36 71.30
0.0108 0.06898 0.4489 71.30 32.01 39.29 94.397 33.70 39.33 73.03
0.0213 0.14114 1.0998 73.03 80.31 -7.28 95.698 81.42 -7.29 74.13
0.0215 0.13599 1.3064 74.13 96.84 -22.71 98.012 99.18 -22.73 76.44
0.0261 0.16012 1.8689 76.44 142.87 -66.42 93.088 135.69 -66.49 69.20
0.0062 0.03045 0.5847 69.20 40.47 28.74 100.439 43.66 28.76 72.43
0.0238 0.12670 2.5799 72.43 186.85 -114.43 99.282 184.70 -114.54 70.16
0.0121 0.05466 1.9380 70.16 135.98 -65.81 90.839 124.41 -65.88 58.54
0.0003 0.00093 0.1209 58.54 7.07 51.46 90.281 7.03 51.51 58.54
0.0000 0.00011 0.0525 58.54 3.07 55.47 95.020 3.24 55.52 58.76
0.0001 0.00015 0.2641 58.76 15.52 43.24 99.659 16.27 43.28 59.56
0.0001 0.00010 1.1329 59.56 67.47 -7.91 96.659 65.44 -7.92 57.52
0.0000 0.00000 0.1055 57.52 6.07 51.45 97.218 6.11 51.50 57.60
o Insurance Simulation
120

100

80

Stock Price
60

40

20

0
24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52
Week No

Portfolio Value Stock Price

 Z
-1.2768191
-0.6716823
0.91304855
-0.1804005
-1.6843978
-0.8621168
-0.7070958
0.39055408
-0.7972494
-0.4956576
0.42589249
-0.8353595
0.41177827
1.77925358
1.16423053
0.25965619
0.50493327
-1.30839
1.75769856
-0.347884
-2.2056884
-0.2173101
1.16032197
1.0764029
-0.8039956
0.06924779
Sales growth 10%
Current assets/Sales 15%
Current liabilities/Sales 10%
Net fixed assets/Sales 85%
Costs of goods sold/Sales
Depreciation rate 8%
Interest rate on debt 7.00%
Interest paid on cash and marketable securities 4%
Tax rate 25%
Dividend payout ratio 60%

Year 0 1 2 3
Income statement
Sales 1,200 1,320 1,452
Costs of goods sold (960) (1,060) (1,126)
Interest payments on debt (25) (26) (26)
Interest earned on cash and marketable securities 2 2 2
Depreciation (78) (86) (94)
Profit before tax 139 150 207
Taxes (35) (38) (52)
Profit after tax 104 113 155
Dividends (62) (68) (93)
Retained earnings 42 45 62

Balance sheet
Cash and marketable securities 40 40 40 40
Current assets 164 180 198 218
Fixed assets
At cost 927 1,020 1,122 1,234
Depreciation -74 (152) (238) (332)
Net fixed assets 853 868 884 902
Total assets 1,088 1,122 1,160

Current liabilities 109 120 132 145

Debt 355 363 371 381
Stock 556 527 496 450
Accumulated retained earnings 36 78 123 185
Total liabilities and equity 1,088 1,122 1,160

target ratio 0.6

FCF
Profit after tax 104 113 155
add depreciation 78 86 94
add increase in CL 11 12 13
add after tax interest on debt 19 19 20
subtract increase in FA at cost (93) (102) (112)
subtract increase in CA -16 -18 -19.8
subtract int earned on mkt sec (2) (2) (2)
101 108 149
covar 0.08
beta 2

Wacc 0.365 0.0525 0.3125

long term G 5%

FCF 101 108 149

TV
101 108 149
NPV $374.38

enterprise value $59.38

4 5

1,597 1,757
(1,273) (1,393)
(27) (28)
2 2
(104) (114)
195 224
(49) (56)
146 168
(88) (101)
59 67

40 40
240 264

1,358 1,493
(435) (550)
922 944
1,202 1,247

160 176
391 402
408 359
243 311
1,202 1,247

146 168
104 114
15 16
20 21
(123) (136)
-21.78 -23.958
(2) (2)
138 158
138 158
525.115067
138 683
 XLF XLI XLK XLU
-2.96% -8.18% -6.15% -1.78%
-10.70% -5.52% 10.51% -12.15%
18.24% 13.91% 8.39% 10.91%
0.97% 1.44% -9.18% 6.55%
2.23% -0.42% -10.40% -0.22%
-4.83% -3.93% 9.96% -3.34%
9.41% 1.55% -5.02% 1.55%
9.56% 9.90% 9.81% 3.90%
2.18% -2.90% -17.94% 13.16%
-0.86% 2.25% -5.73% 5.81%
-5.11% -3.40% -20.51% -0.05%
8.51% 3.94% -9.89% -1.35%
-0.24% 0.38% 19.12% -5.63%
-6.73% -5.99% -24.91% 2.08%
-3.00% -9.57% -11.46% -1.46%
3.62% 11.43% 16.17% 4.83%
4.40% 4.19% -4.10% 0.70%
-0.73% -6.17% 1.95% -5.03%
-0.95% -0.21% -6.92% -0.90%
-6.61% -3.43% -12.20% -3.56%
-5.68% -14.68% -16.38% -0.94%
-1.42% 1.77% 10.91% -5.26%
6.49% 10.00% 14.94% -1.26%
1.95% 4.93% -2.20% 3.20%
-1.14% -6.32% -1.08% -3.60%
-1.73% 2.50% -12.99% -0.19%
6.61% 2.71% 4.91% 5.32%
-2.54% -6.90% -12.09% -6.07%
-0.30% 0.43% -4.15% -0.83%
-4.28% -6.13% -13.36% -6.72%
-8.31% -5.66% -9.48% -14.72%
1.87% -1.56% -0.84% 3.97%
-11.49% -11.53% -16.69% -12.08%
9.14% 4.92% 24.77% -2.30%
3.72% 5.22% 15.85% 2.91%
-5.41% -3.93% -13.21% 3.24%
-1.27% -5.39% -2.36% -2.35%
-3.08% -1.54% 0.48% -5.35%
-0.92% 1.08% -1.52% 5.07%
12.57% 10.82% 9.16% 8.64%
5.09% 2.71% 8.58% 10.11%
0.43% 2.09% 0.71% 1.38%
4.36% 3.31% 3.10% -6.69%
-1.17% 3.89% 4.77% 1.99%
0.90% -2.72% -0.87% 4.96%
6.93% 6.18% 7.33% 0.68%
-0.37% 1.98% 1.43% 0.23%
4.52% 6.62% 3.12% 6.52%
3.27% 1.01% 4.27% 2.06%
2.86% -0.74% -2.54% 1.89%
 -1.16% -1.23% -2.66% 1.07%
-4.35% -0.04% -3.82% -4.28%
1.71% 2.46% 3.92% 1.20%
0.44% 6.17% 2.73% 1.72%
-2.13% -2.79% -6.09% 1.52%
3.25% 0.07% -4.42% 4.06%
-0.91% 2.15% 2.91% 0.63%
0.53% 1.02% 4.39% 4.87%
3.11% 6.28% 5.11% 4.45%
4.13% 2.48% 2.61% 2.45%
-2.16% -2.80% -5.64% 2.12%
-0.67% 1.16% 0.15% 2.14%
-3.79% -0.04% -1.95% 1.11%
0.18% -3.65% -3.53% 3.09%
2.95% 3.17% 6.94% -0.07%
1.25% -2.63% -1.29% 5.93%
1.56% 3.81% 5.67% 2.25%
-1.64% -2.36% -0.95% 0.65%
0.86% 1.67% 0.24% 4.22%
3.05% -1.43% -2.30% -6.40%
4.77% 5.82% 6.32% -0.16%
0.03% 0.48% -3.05% 0.89%
0.88% 0.29% 3.35% 2.42%
2.13% 3.11% 0.23% 1.31%
0.30% 4.42% 2.26% -4.60%
4.33% 2.16% -1.31% 1.59%
-3.77% -1.71% -6.50% 1.63%
-0.47% -0.13% -0.49% 2.29%
2.29% -5.68% -2.61% 4.80%
1.18% 1.13% 7.02% 2.75%
4.01% 3.81% 4.03% -1.46%
2.34% 2.82% 4.05% 5.30%
0.71% 2.45% 2.75% 2.65%
3.76% 0.49% -0.53% 0.86%
0.93% 2.09% 2.02% -0.35%
-3.05% -0.90% -2.87% 5.08%
-0.48% 0.58% 1.17% 3.79%
3.87% 4.64% 4.72% 4.91%
2.40% 5.19% 5.04% 0.46%
-4.00% 0.03% -0.13% -4.74%
-9.07% 0.95% -0.20% -3.99%
2.58% 0.03% 1.92% 1.58%
2.45% 4.73% 3.77% 3.85%
-1.72% -1.29% 5.30% 6.66%
-8.09% -2.84% -7.54% 0.66%
-5.83% -0.14% 1.99% -0.17%
0.73% -5.52% -12.79% -7.35%
-11.36% -2.03% -4.73% -4.11%
-2.95% 3.62% 1.15% 1.60%
7.00% 2.94% 6.25% 5.11%
-6.95% 0.88% 6.51% 3.59%
 -17.37% -11.99% -9.35% -0.74%
6.76% 0.79% -2.44% -6.44%
-0.97% 2.74% 1.79% -1.10%
-6.26% -12.05% -12.44% -10.97%
-21.92% -18.25% -16.12% -13.00%
-18.48% -8.22% -8.41% 4.19%
0.34% 2.28% 1.58% -2.43%
-26.20% -12.00% -4.74% -0.17%
-17.75% -17.03% -3.81% -12.53%
17.06% 8.79% 11.17% 1.90%
21.79% 18.07% 10.44% 1.17%
13.98% 3.35% 2.32% 3.56%
-1.79% -1.70% 3.63% 5.37%
8.87% 8.74% 8.18% 3.76%
12.99% 4.77% 1.62% 1.00%
1.95% 5.85% 4.63% 1.39%
-5.96% -3.99% -1.25% -3.20%
4.34% 8.78% 5.53% 4.83%
-1.42% 1.67% 5.79% 5.47%

var 0.0049 0.0034 0.0066 0.0023

std 0.0702 0.0579 0.0815 0.0484
mean 0.03% 0.26% -0.31% 0.50%

0.004932 0.00407 0.005726 0.0034

0.00407 0.003358 0.004725 0.002805
0.005726 0.004725 0.006648 0.003947
0.0034 0.002805 0.003947 0.002344
Risk Free Monthly 0.005

Trad Sample Matrix

0 1 2 3 Mean Return Er-C
0 0.00493182 0.003244 0.002792 0.001524 0.0002590 -0.00474
1 0.00324408 0.003358 0.003097 0.001404 0.0025759 -0.00242
2 0.00279229 0.003097 0.006648 0.000896 -0.0030549 -0.00805
3 0.00152385 0.001404 0.000896 0.002344 0.0049522 -0.00005

Tangency at c=0.5
Port Return -0.0163787
Port Sd 0.17472573
Theta -0.1219656

Constant Correl 0 1 2 3 std matrix 0

0 1 0.797152 0.487659 0.44822 0 0.004932
1 0.79715208 1 0.655468 0.500483 1 0.00407
2 0.48765893 0.655468 1 0.227085 2 0.005726
3 0.44822018 0.500483 0.227085 1 3 0.0034

average corre0.519344

Constant Corr Matrix 0 1 2 3 Mean Return Er-C

0 0.00493182 0.002114 0.002974 0.001766 0.0002590 -0.00474
1 0.00211351 0.003358 0.002454 0.001457 0.0025759 -0.00242
2 0.00297372 0.002454 0.006648 0.00205 -0.0030549 -0.00805
3 0.00176566 0.001457 0.00205 0.002344 0.0049522 -0.00005

Port Return 6.381E-06

Port Sd 0.32607233
Theta -0.0153145
 Weights Weights c= 0.5
-1.576214 -0.8697195 -1.541371 2.201099
2.625227 1.44854112 2.0832 -2.974839
-1.29846 -0.716461 -1.580316 2.256714
2.061772 1.13763939 0.338213 -0.482973

1 1

1 2 3 corr 0 1 2 3
0.00407 0.00572591 0.0034 0 1 0.519344 0.519344 0.519344
0.003358 0.00472484 0.002805 1 0.519344 1 0.519344 0.519344
0.004725 0.00664786 0.003947 2 0.519344 0.519344 1 0.519344
0.002805 0.00394719 0.002344 3 0.519344 0.519344 0.519344 1

Weights
-0.742221 1.9788284
0.022438 -0.0598219
-1.437483 3.8324600
1.782184 -4.7514664
1
So 100
Lower X 100
higher X 125
Sd 0.3
Rfr 0.05
 Page 699

A B C D E
1 Experimenting with Bond Portfolios and Convexity
2
3 Yield to maturity (YTM) 5%
4
5 bond 1 bond 2 bond 3
6 Coupon rate 7.00% 4.000%
7 Maturity 5 10
8 Face value 1,000 1,000
9
10 Bond price $1,086.59 $922.78 <-- =-PV($B$3,D7,D6*D8
11 Face value of $1,000 investment 920.31 1,083.68 <-- =D8/D10*D8
12
13 Beginning date 3/Nov/08 3/Nov/08 <-- =DATE(2008,11,3)
14 Ending date 3/Nov/13 3/Nov/18 <-- =DATE(YEAR(D13)+D
15
16 Duration 4.4150 8.3596 <-- =DURATION(D13,D1
17
18 New YTM 5%
19
Bond
20 Bond 1 Bond 2 Portfolio (1
& 2)
21 Bond price $1,000.00 $956.71
22 Reinvested coupons $386.79 $221.03
23 Total $1,386.79 $1,177.73
24
25 Multiply by percent of face value bought 92.03% 108.37% Obligation 1000000
26 Product $ 1,276.28 $ 1,276.28 $ 1,276.28
27
28 Portfolio of bonds 1 and 3
29 Proportion of bond 1 0.8517 $1,062.30
30 Proportion of bond 2 0.1483 783.53
31 832336.54
32
Bond
33 Bond 1 Bond 2 Bond 3
portfolio
34 Interest Rate 1276.28 1276.28 0.00 1276.28
35 0% $0.00 $1,283.16
36 1% $0.00 $1,280.61
37 2% $0.00 $1,278.68
38 3% $0.00 $1,277.33
39 4% $0.00 $1,276.54
40 5% $0.00 $1,276.28
41 6% $0.00 $1,276.53
42 7% $0.00 $1,277.27
43 8% $0.00 $1,278.47
44 9% $0.00 $1,280.12

Page 19
 Page 699

A B C D E
45 10% $0.00 $1,282.20
46 11% $0.00 $1,284.70
47 12% $0.00 $1,287.60
48 13% $0.00 $1,290.88
49 14% $0.00 $1,294.54
50 15% $0.00 $1,298.56
51
52
53
54 $1,305.00
55
$1,300.00
56
57 $1,295.00
58
59 $1,290.00
60
61 $1,285.00 Bond 1
62 Bond 2
$1,280.00
63 Bond portfolio
64 $1,275.00
65
66 $1,270.00
67
68 $1,265.00
69 0% 1 % 2% 3 % 4% 5 % 6% 7 % 8% 9 % 10 % 1 1 % 12 % 13 % 14 % 15 %
70

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 Page 699

F G
1
2
3
4
5
6
7
8
9
<-- 10
=-PV($B$3,D7,D6*D8)+D8/(1+$B$3)^D7
<-- 11
=D8/D10*D8
12
<-- 13
=DATE(2008,11,3)
<-- 14
=DATE(YEAR(D13)+D7,MONTH(D13),DAY(D13))
15
<-- 16
=DURATION(D13,D14,D6,$B$3,1)
17
18
19

20

21
22
23
24
25
26 <-- =B29*B26+(1-B29)*D26
27
28
29 price of combination bond
30 no. of units
31 price of immunization
32
33
34 <-- =E26, Data Table Header
35
36
37
38
39
40
41
42
43
44

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 Page 699

F G
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Bond 1 61
Bond 2 62
63
Bond portfolio
64
65
66
67
68
69
70

Page 22