Problem: Decomposing Stock Returns
For this question, try to download annual returns of two equally weighted portfolios consisting of all NYSE and AMEX stock from 1926 to 2022. Instruction on how to get the data is explained in the attached document titled "WRDS Manual."
The first portfolio return you should extract is "equally weighted return (includes distribution such as dividend)" and the second portfolio return is "equally weighted return (excluding dividends)."
= = N i equal i r N r 1 1 , ?Equally weighted portfolio return of a year is defined as
where N is the number of stocks in a year and i r is individual firm i's annual stock return. Thus, equally weighted portfolio return is the arithmetic average of all annual stock returns for a year. We approximate dividend yield of equally weighted portfolio as the difference between the two portfolios.
1. Calculate the geometric average of capital gains component and dividend yield component for 1926-2022. Repeat the exercise for more recent period of 1971- 2022.
2. Calculate standard deviations of capital gains and dividend yield using STDEV function of excel. Report each variable's standard deviation for the whole sample (1926-2022) and for 1971-2022 sample.
3. Plot 3 types of Moving Average of 7-year (Arithmetic MA(7), Geometric MA(7), Centered MA(7) and Stock Index Return into one graph, using equally weighted return with distribution data. Hint) The period of output data of Arithmetic MA(7) and Geometric MA(7) will be from 1932 to 2022. Centered MA(7) will be from 1929 to 2019.