1. Perfect Foresight

Question 1

Likelihood of S&P500 going up, down and remaining the same?

Answer 1

52.7% of days up, 47% down, 0.3% of days unchanged (50/50, coin toss chance of going up/down)

Question 2

Number of trading days in a year?

Answer 2

251 (no weekends or public holidays)

Question 3

Return on S&P500 over 50 years (%)

Answer 3

9.83% ($1 grew to $108.45)

Question 4

If you have perfect foresight on only one trading day out of 100, how much will your return increase?

Answer 4

1% (up to 10.83%)

Question 5

Averaged dividend yield over 50 years?

Answer 5

3.1% (1963-2013)
* Highest = 6.7% (recession)
* Lowest = 1.1% (dotcom bubble)

Question 6

Perfect foresight without transaction costs means you…

Answer 6

will frequently trade even if the trading profit is 1bp (0.0001), t-costs eat up trading profits

Question 7

T-cost equation?

Answer 7

Broker commission + 1/2(bid-ask spread)/price paid total for investment

Question 8

Reinvested dividends account for what percentage of ending wealth?

Answer 8

79%

Question 9

Stocks are…

Answer 9

volatile

Question 10

T-bills provide…

Answer 10

stable but lower returns ($1 to $13.25)

Question 11

If you had perfect foresight everyday for 50 years what would your ending wealth be on a $1 investment?

Answer 11

$396 million trillion dollars

Question 12

The lesson we learn from imperfect foresight is….

Answer 12

Passive investment is better than active investing without skills (9.83% S&P500 > 7.90% tossing a coin each day)