Question

4. (5pts) An investor is looking for a hedge against falling stock market prices. She is considering investing in gold after
	observing its solid performance during the stock market crash of 2007-2009. There are two primary ways to
	invest in gold, either purchasing gold bullion and storing it in a personal vault, or purchasing shares of an
	exchange-traded fund that is backed by gold bullion stored for you.
		The overall stock market is measured by the Standard & Poors Index of 500 top US Corporations' average stock price.
		The value of gold bullion per ounce is "Gold Price".
		The value of exchange-traded shares backed in gold is "SPDR GLD"
	Date	S&P500	Gold Price	SPDR GLD		a. Construct line plots of the 3 alternative investments on the same axes.
	1-Oct-07	1829	742.50	73.93
	1-Nov-07	1738	790.25	77.93
	3-Dec-07	1725	784.25	78.28		b. Do either the Gold Price or SPDR GLD appear to be good hedges against a
	2-Jan-08	1611	846.75	84.81		falling stock market? In other words, does either gold investment maintain
	1-Feb-08	1557	914.75	89.90		its value while the S&P500 falls? Which of the two gold investments looks
	3-Mar-08	1529	988.50	97.22		most profitable in a period of falling stock market prices?
	1-Apr-08	1592	887.75	86.83
	1-May-08	1595	853.00	83.97
	2-Jun-08	1443	888.25	87.93
	1-Jul-08	1422	937.50	92.70
	1-Aug-08	1445	912.50	89.57
	2-Sep-08	1315	798.50	79.20		c. Construct a simple index of each monthly value for the 3 investments.
	1-Oct-08	1104	880.00	85.98		Use 1-Oct-07 as the base.
	3-Nov-08	1042	729.50	71.13
	1-Dec-08	1060	778.00	75.65
	2-Jan-09	965	874.50	86.23		d. Construct line plots of your 3 indices in a single chart.
	2-Feb-09	855	918.25	88.81
						e. Examine your plot of indices. Does this plot change your conclusion from part b?

Answer 1

a). The plots of three investments on same axes is as shown below

(Kindly note that gold price is valued in money and the shares are depicted in stock market index .Hence we have shown gold shares and s&P 500 onsecondary axes and gold price on primary axis.

b).Look at the graph. The SPDR GLD tends to show a nominal variation with an aggregated average monthly increase of 8.25 % . The gold price on the other hand has been volatile and has shown an aggegated monthly increase of about 10.34 % .

Hence if we are considering the investment window from 1 oct -07 to 2 feb -09, investment in gold price is a better option. However kindly note that inference is completely based on selection of period. For eg. upto nov -08 , SPDR GLD is better option .(-0.21% as compared to -1 % for gold price)

c). The indexed chart of the three investment options are as shown below.

e). The index plot has greatly changed the view that ihad made based on my observations of the graphs of the three options. I can now see that the the gold price and the SDPR GLD vary over time in a very similar manner and hence both appear ot be equally good options.