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FINA310: Behavioural Finance

Homework 1

Due August 2, 11:59pm on Nuku

In Chapter 1 of the “Irrational Exuberance” by Robert Shiller, we see the history of the real S&P 500 price index as well as its real earnings in Figure 1.1 and the cyclically adjusted price earning ratio (CAPE) as well as the long-term interest rate in Figure 1.3. But the data series are from 1871 to 2014. In this homework, we will look at the data series extended to July 2023 (the dividend and earning data are updated to March 2023). You are then asked to analyze if there are any signs that the U.S. stock market is in a bubble currently. The Excel file SP500 Data.xls provides you all the data that are necessary for your calculations. You can find the monthly S&P 500 index price as well as its dividends and earnings. You can also find the monthly Consumer Price Index (CPI) and the long-term interest rate. Some calculations have already been done for you in the other columns of the dataset. These data series span Jan 1871 to July 2023.

1. (2 points) How are the real S&P 500 index price and its real earnings calculated in the Excel? Explain them using economic terms (not in Excel language such as C2/A1).

2. (2 points) How is the CAPE calculated in the Excel? Explain it using economic terms.

3. (4 point) If you look at the S&P 500 index price, there was a local minimum of 757.13 in March 2009. What is the real rate of return on the capital gains of the S&P 500 from March 2009 to July 2023? What is the total real return of the S&P 500 from March 2009 to July 2023?

4. (4 points) What is the percentage increase of the real earnings of the S&P 500 from March 2009 to March 2023? What is the percentage increase of the real dividends of the S&P 500 from March 2009 to March 2023?

5. (2 points) What are the CAPE of the S&P 500 in March 2009 and in July 2023, respectively?

6. (1 points) Do you think that the S&P 500 index price has increased too fast in the last fourteen years so that there might be a bubble now?