THE PAPER SHOULD COVER ALL THE MATTERS LISTED BELOW WITHIN AT LEAST FOUR OF THE FOLLOWING FIVE TOPICS.
Topic 1 . Stocks are particularly risky when the investment horizon is short; see Problem Set 1, Question 2, parts a-d (investing in stocks with a one-year investment horizon); Discuss the large historical drops in the US stock market (including that in February−March 2020); see slide 2-9.
Topic 2 . Stock daily returns have ‘fat’ tails (‘extreme’ daily returns are more likely than what the Normal distribution suggests). What were the largest daily percentage losses in the history of the US stock market? See slide 7-6, the virtual handout on ‘extreme’ daily losses in the US stock market, and slide 7-13. [Two interesting matters discussed in the course after the paper is due (and thus not included in Topic 2) are: (i) the expected future volatility of the US stock market inferred from option prices (e.g., reported as the VIX index); and (ii) the impact of ‘fat’ tails on the Black-Scholes option pricing model].
Topic 3 . Breakdowns in stock correlations limit diversification benefits during crises (Treasury bonds are typically useful); see slides 9-11 and 9-12. Stock diversification reduces unique risk but does not eliminate market risk; see slides 11-16 through 11-19.
Topic 4 . Do stock prices reflect/embed available information (e.g., the economic impact of the Pandemic)? See slides 15-2 through 15-5 (notion of market efficiency) as well as slides 15-15 and 15-16 (comparison of the two views in academia regarding market efficiency).
Topic 5 . What is the extent to which the CAPE ratio of the US stock market predicts long-term US stock market returns? see slide 17-16. Are practitioners able to precisely forecast short-term stock returns (i.e., ‘timing the market’)? See slide 17-17. What is the sensitivity of P/E ratios and stock prices to the expected growth rate of earnings? See slides 17-18, 17-19, and 17-22.
Below I will provide slides to help with the topic of coursework.
