FM3, Cumulative Typos

This version: 24 August 2010

http://finance.wharton.upenn.edu/~benninga/fm3/fm3_cumulative_typos.doc
Financial Modeling, 3rd edition will be reprinted a number of times. At each
reprinting I will correct reported typos and add the names of those reporting to the
preface.
Notation: This is a cumulative list of all known typos.
indicate in which printing the typo was corrected. Thus:

The square brackets

[1] Page 20, line 4: Indicates a typo which was corrected that exists in the
first printing and does not exist in later printings.

[2] Page 890, exercise 6: Indicates a typo that exists in both the first and
second printings but is corrected in the third printing.

[3] Page 690: A typo in both the first, second and third printing; corrected
in fourth.

If
you
have
more
typos
Benninga@wharton.upenn.edu .

to

report,

please

write

me

at

Add names to preface of second printing (names added to list on page

xxvii in alphabetical order): Sara Tromp, Alexander Nagornov, Roberto Wessels,
Polina Elencheva, Julian Bongo, Sali Salieski, Edwin Neave, Robert Keyfitz, Stephen
R Ellis, Stanislava Prokopova, Nikolas Rokkanen , Sanjiv Sabherwal, Sumit Vakil, Jeff
Levitt, Jeff Marsick, , Michael Ezewoko, Rik Albrecht , Joseph Williams, Leon Lasdon,
Stephen Marley, Michael Oczkowski, Apostol Bakalov, Max Nokhrin, Gerald Strever
Names added to preface of third printing (inserted alphabetically on page
xxvii): Eric D. Chason, Jean-Philippe Ducros, Luis Carlos Lpez Wonenburguer , Todd
Hildebrant, Dina Rajaona, Daniel R. Sholem, Swarup Ghosh, David Schuster, Jakob
Trap Ottesen, David M. Rasul, Joseph Hamel, Jobbe Jorna, Dina Rajaona, Joshua
Packwood, Sanjiv Sabherwal, Andrew Carver, Massimo di Tria
Names added to preface of fourth printing (inserted alphabetically on
page xxvii): Brennan Lansing, Quinn Lewis, Shavkat Sultanbekov, Paul Ledin,

[1] Page before title page: It says Neither MIT press nor the authors is
responsible . Shouldnt this be are responsible? [My 96 year-old aunt Sara
pointed this out to me !]
[1] On the disk with the book, under the subdirectory Additional materials,
there is a typo in the file Adding Getformula to your spreadsheet.doc. The last
line of the VBA program is missing. It is added below and highlighted.
'Prints out formulas as text
'Thanks to Maja Sliwinski and Beni Czaczkes

FM3, cumulative typos

Page 1

Function getformula(r As Range) As String

Application.Volatile
If r.HasArray Then
getformula = "<-- " & " {" & r.FormulaArray & "}"
Else
getformula = "<-- " & " " & r.FormulaArray
End If
End Function

[1] Page 20, line 4:

Instead of: years 1, 2, 9
Should be: years 1 to 9
[2] Page 21, screen shot should be replaced with

[2] Page 32, exercise 4 solution on disk: Cell B2 should be =B5+NPV(B1,B6:B10)

and not as printed.
[1] Page 41: The following formula has typo.

P0 =

Div0 ( 1 + g )
1 + rE

=
t =1

Div1 * ( 1 + g )

Div0 * ( 1 + g )

( 1 + rE )

( 1 + rE )

Div1 * ( 1 + g )

( 1 + rE )

Div1 * ( 1 + g )

( 1 + rE )

It should be:

FM3, cumulative typos

Page 2

Div0 ( 1 + g ) Div0 * ( 1 + g )
Div0 * ( 1 + g )
Div0 * ( 1 + g )
P0 =
+
+
+
K
2
3
4
1 + rE
( 1 + rE )
( 1 + rE )
( 1 + rE )
2

=
t =1

Div0 * ( 1 + g )

( 1 + rE )

[2] page 42, 3rd line above the bottom spreadsheet:

Instead of: P0 = $50
Should be: P0 = $60

[1] Page 72, top Excel clip; there is a mistake in cell B14. Should be:
A
1
2
3
4
5
6
7
8
9
10

KRAFT: COST OF EQUITY rE BASED ON CASH FLOW TO EQUITY

Shares outstanding
Share price, end 2005
Equity value, E
End 2005 total equity payout

1,669,880,755
27.75
46,339,190,951 <-- =B2*B3
2,612,000,000 <-- =E18

High growth rate, ghigh

Number of high-growth years
Normal growth rate, gnormal

20.00% <-- Guess

3 <-- Guess
6% <-- Guess

Cost of equity, rE, using the

11 function twostagegordon
12
13
14
15
16
17
18
19
20
21

Date
31-Dec-01
31-Dec-02
31-Dec-03
31-Dec-04
31-Dec-05
Growth rates
Four year
Two year

14.46% <-- =twostagegordon(B4,B5,B7,B8,B9)

Stock
Dividends paid
repurchases
170,000,000
225,000,000
372,000,000
936,000,000
372,000,000
1,089,000,000
688,000,000
1,280,000,000
1,175,000,000
1,437,000,000
62.14%
77.72%

Stock issuance
8,425,000,000

Cash flow to
equity holders
395,000,000 <-- =B14+C14-D14
-7,117,000,000 <-- =B15+C15-D15
1,461,000,000
1,968,000,000
2,612,000,000

58.97%
14.87%

60.36% <-- =(E18/E14)^(1/4)-1

33.71% <-- =(E18/E16)^(1/2)-1

[3] Page 91, exercise 11.b: The word and is missing:

Instead of: both the classic CAPM the tax-adjusted model
Should be: both the classic CAPM and the tax-adjusted model
[3] Page 116, Excel picture: Should be replaced by the following:
A
68 Cash and marketable securities
69 NPV of row 60 = enterprise value
70 Net year 0 debt: debt minus cash
71 Equity value

FM3, cumulative typos

as negative debt
1,231 <-- =B62
(240) <-- =-B36+B27
991 <-- =B69+B70

Page 3

[2] Exercises on pages 127-129: In the following cells the NPV( ) should be
multiplied by the factor (1+WACC)^0.5: B84 of Exercise 2, B82 of Exercise 3, B81
of Exercise 4, B82 of Exercise 7, B90 of Exercise 8.
[3] Page 128, exercise 3: in the answer in line 32, the depreciation in line 31
should be added to the fixed assets at cost, not subtracted. [The depreciation is
written as a negative number.] Fixed on the disk that comes with the fourth
printing.
[1] Page 138: In spreadsheet at top, cell A6 before instead of nefore
[1] Page 139, line 2 below spreadsheet: some instead of come
[2] Page 155. The graphic should be replaced with the following (the x-axis legend
had a mistake):
A
1

PPG: EARNINGS PER SHARE VERSUS EARNINGS

Earnings
Profits
2
Year
per share after taxes
3
1990
0.95
276
4
1991
1.90
276
5
1992
3.01
319
6
1993
2.78
22
7
1994
2.43
515
8
1995
3.80
768
9
1996
3.96
744
10
1997
3.97
714
11
1998
4.52
801
12
1999
3.27
568
13
2000
3.60
620
14
15 Compound growth
14.25%
8.43% <-- =(C13/C3)^(1/10)-1
16
17
PPG: EPS versus Profits
18 Source:
5.00Profit-loss 91-00 in this
19 workbook
4.50
20
4.00
21
3.50
22
3.00
23
S 2.50
24
P
E 2.00
25
26
1.50
27
1.00
28
0.50
29
0.00
30
31
199 0 1991 1992 1993 19 94 1995 1996 1997 1998 1999 2000
32
Earning s
Pro fits
33
per shar e
afte r taxes
34

FM3, cumulative typos

900
800
700
600
500
400
300

s
itf
o
r
P

200
100
0

Page 4

[1] Page 183: Basil should be Basle or Basel

[2] Page 203, last word of second paragraph: lessor should be lessee
[2] Page 206, second bullet, line 2:
Instead of: outflow, hence positive
Should be: outflow, hence negative
[2] Page 206, second bullet, line 4:
Instead of: negative sign
Should be: positive sign
[2] Page 215, first sentence below the table:
Show that it will be

Insert following sentence before

ABCs interest costs are 10% and XYZs interest costs are 7%.
Thus the whole paragraph will read:
ABCs interest costs are 10% and XYZs interest costs are 7%. Show that it will be
advantageous for ABC to lease the asset and for XYZ to purchase the asset in order
to lease it out to ABC.

FM3, cumulative typos

Page 5

[1] Page 226. The formula in cell D15 is incorrectly identified (the numbers and
the actual formula in the cell are correct). The spreadsheet should look like the
following:
A

Cash
flow
-100,000
31,000
22,000
16,000
22,000
35,000

Year
0
1
2
3
4
5
IRR

8.097% <-- =IRR(B3:B8,0)

CASH FLOW ATTRIBUTION TABLE

Year

14
15
16
17
18
19
20
21

UNDERSTANDING THE IRR

1
2
3
4
5
6
7
8
9
10
11
12
13

1
2
3
4
5

Attribution of cash flow

Investment at
Repayment
Cash flow at end of
Income
beginning of
of
year
period
investment
100,000
31,000
8,097
22,903 <-- =C15-D15
77,097
22,000
6,242
15,758
61,339
16,000
4,966
11,034
50,305
22,000
4,073
17,927
32,378
35,000
2,622
32,378

=B16-E16

=$B$10*B15

[1] Page 229, line 10 of second bullet:

Instead of: at the beginning of year 6
Should be: at the beginning of year 9
[2] Page 242, first formula:
Instead of: Cov(rWMT , rTGT ) =
Should be: Cov(rWMT , rTGT ) =

1
M

E (rWMT ) rWMT ,t E (rWMT )

1
M

E (rWMT ) rTGT ,t E (rTGT )

WMT ,t

WMT ,t

[1] Page 242, 5 lines under the spreadsheet.

Instead of: Covar(SLE returns,BBY returns)
Should be: Covar(WMT returns, TGT returns)
[1] Page 244, line 2:
Instead of: linearly related with a positive slope

FM3, cumulative typos

Page 6

Should be: linearly related with a negative slope

[1] Page 246, spreadsheet cell B11: Incorrectly references cell B7 (should be
cell B6). The corrected spreadsheet should look like this:
A

15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39

CALCULATING THE MEAN AND STANDARD DEVIATION OF A PORTFOLIO

Asset returns
Mean return
Variance
Standard deviation
Covariance

WMT
TGT
1.59%
0.46%
0.93%
0.52%
9.63%
7.19%
0.0038

Proportion of WMT
Portfolio mean return
Portfolio return variance
Portfolio return standard deviation

0.5 <-- In the data table below this is varied from -0.5 to 1.5
1.02% <-- =B8*B3+(1-B8)*C3
0.0055 <-- =B8^2*B4+(1-B8)^2*C4+2*B8*(1-B8)*B6
7.42% <-- =SQRT(B11)

Data table: Varying the proportion of WMT

Portfolio Porfolio
standard
mean
deviation
return
Proportion of WMT
7.42%
1.02% <-- =B10, Table header
-0.5
9.08%
-0.11%
Portfolio Mean and Standard Deviation
-0.4
8.58%
0.00%
2.5%
Varying the Proportions of WMT and TGT
-0.3
8.13%
0.12%
-0.2
7.74%
0.23%
-0.1
7.42%
0.34%
2.0%
0
7.19%
0.46%
0.1
7.04%
0.57%
0.2
6.99%
0.68%
1.5%
0.3
7.04%
0.80%
0.4
7.19%
0.91%
0.5
7.42%
1.02%
1.0%
0.6
7.74%
1.14%
0.7
8.13%
1.25%
0.8
8.58%
1.36%
0.5%
0.9
9.08%
1.48%
1
9.63%
1.59%
1.1
10.22%
1.70%
0.0%
1.2
10.84%
1.82%
0%
2%
4%
6%
8%
10%
1.3
11.48%
1.93%
1.4
12.15%
2.04%
-0.5%
1.5
12.84%
2.16%

rtu
n
a
e
M

1
2
3
4
5
6
7
8
9
10
11
12
13
14

12%

14%

Standard deviation

[2] Page 267, statement of Proposition 3:

Instead of: exists an envelope portfolio x
Should be: exists an envelope portfolio M
The equation following should be:
Instead of: E ( rx ) = rf + x E ( rx ) rf
Should be: E ( rx ) = rf + x E ( rM ) rf

[1] Page 269, bottom spreadsheet, column E: should refer to portfolio y

not x.
[1] Page 270, same as above
[2] Page 271, bottom graphic should be replaced by following (correction of cell
D42):

FM3, cumulative typos

Page 7

A
B
C
D
E
F
G
34 A single portfolio calculation
35 Proportion of x
0.3
36 E(rp)
7.05% <-- =B35*B26+(1-B35)*F26
37 p
19.65% <-- =SQRT(B35^2*B27+(1-B35)^2*F27+2*B35*(1-B35)*C30)
38
39
40 Data table: we vary the proportion of x to produce a graph of the frontier
Sigma
Return
41 Proportion of x
42
0.1965
0.0705 <-- Data table header refers to cells B37 and B36
43
-1.400
0.2199
0.0734
44
-1.200
0.2164
0.0730
0.0740
45
-1.000
0.2131
0.0727
46
-0.800
0.2100
0.0724
0.0730
47
-0.600
0.2070
0.0720
48
-0.400
0.2043
0.0717
49
-0.200
0.2018
0.0713
0.0720
50
0.000
0.1995
0.0710
Portfolio y
51
0.100
0.1984
0.0708
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70

0.200
0.300
0.400
0.500
0.600
0.700
0.800
0.900
1.000
1.200
1.400
1.600
1.800
2.000
2.200
2.400
2.600
2.800
3.000

0.1974
0.1965
0.1956
0.1948
0.1941
0.1934
0.1927
0.1922
0.1917
0.1909
0.1903
0.1901
0.1901
0.1903
0.1908
0.1916
0.1927
0.1940
0.1956

0.0707
0.0705
0.0703
0.0702
0.0700
0.0698
0.0697
0.0695
0.0693
0.0690
0.0686
0.0683
0.0680
0.0676
0.0673
0.0670
0.0666
0.0663
0.0659

FM3, cumulative typos

Proportion of x: -1.0
Proportion of y: 2

0.0710

Portfolio w:
50% in x, 50%
in y

0.0700

Portfolio x

0.0690
0.0680

Proportion of x: 2.8
Proportion of y: -1.8

0.0670
0.0660
0.0650
0.1850

0.1900

0.1950

0.2000

0.2050

0.2100

0.2150

0.2200

0.2250

Page 8

[1] Page 246: There is a mistake in cell B11 (refers to cell b7 instead of
b6). Means that the picture in the book needs to be replaced.
A

15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

CALCULATING THE MEAN AND STANDARD DEVIATION OF A PORTFOLIO

Asset returns
Mean return
Variance
Standard deviation
Covariance

WMT
TGT
1.59%
0.46%
0.93%
0.52%
9.63%
7.19%
0.0038

Proportion of WMT
Portfolio mean return
Portfolio return variance
Portfolio return standard deviation

0.5 <-- In the data table below this is varied from -0.5 to 1.5
1.02% <-- =B8*B3+(1-B8)*C3
0.0055 <-- =B8^2*B4+(1-B8)^2*C4+2*B8*(1-B8)*B6
7.42% <-- =SQRT(B11)

Data table: Varying the proportion of WMT

Portfolio Porfolio
standard
mean
deviation
return
Proportion of WMT
7.42%
1.02% <-- =B10, Table header
-0.5
9.08%
-0.11%
-0.4
8.58%
0.00%
Portfolio Mean and Standard Deviation
2.5%
-0.3
8.13%
0.12%
Varying the Proportions of WMT and TGT
-0.2
7.74%
0.23%
-0.1
7.42%
0.34%
2.0%
0
7.19%
0.46%
0.1
7.04%
0.57%
0.2
6.99%
0.68%
1.5%
0.3
7.04%
0.80%
0.4
7.19%
0.91%
0.5
7.42%
1.02%
1.0%
0.6
7.74%
1.14%
0.7
8.13%
1.25%
0.8
8.58%
1.36%
0.5%
0.9
9.08%
1.48%
1
9.63%
1.59%
1.1
10.22%
1.70%
0.0%
1.2
10.84%
1.82%
1.3
11.48%
1.93%
0%
2%
4%
6%
8%
10%
1.4
12.15%
2.04%
1.5
12.84%
2.16%
-0.5%

rtu
n
a
e
M

1
2
3
4
5
6
7
8
9
10
11
12
13
14

12%

14%

Standard deviation

[2] Page 249, last picture, should be replaced by the following:

FM3, cumulative typos

Page 9

rtu
n
a
e
M

A
B
C
D
E
F
17 Calculating returns of combinations of Portfolio x and Portfolio y
18 Proportion of Portfolio x
0.3
19 Mean return, E(rp)
11.13% <-- =B18*B12+(1-B18)*E12
2
20 Variance of return, p
14.06% <-- =B18^2*B13+(1-B18)^2*E13+2*B18*(1-B18)*B14
21 Stand. dev. of return, p
37.50% <-- =SQRT(B20)
22
23 Table of returns (uses this example and Data|Table)
Proportion
Standard
Mean
24
of x
deviation
25
37.50%
11.13% Table header: =B21,=B19
26
0.0
45.10%
12.00%
27
0.1
42.29%
11.71%
28
0.2
39.74%
11.42%
29
0.3
37.50%
11.13%
Returns of Combinations of
30
0.4
35.63%
10.84%
Portfolios x and y
13%
31
0.5
34.20%
10.55%
12%
32
0.6
33.26%
10.26%
12%
33
0.7
32.84%
9.97%
11%
34
0.8
32.99%
9.68%
11%
35
0.9
33.67%
9.39%
10%
36
1.0
34.87%
9.10%
10%
37
1.1
36.53%
8.81%
9%
38
1.2
38.60%
8.52%
9%
39
8%
40
30%
35%
40%
45%
41
Standard deviation
42
43

50%

[1] Page 281: The function in cell B42 contains a mistake. Should be:
A
B
C
D
E
Check Propositions 3 & 4: Step 2 coefficients should be:
41 Intercept = c, Slope = E(rw) - c
42 Intercept = c ?
yes
<-- =IF(ROUND(B37-B21,10)=0,"yes","no")
Slope
=
E(r
)
c
?
43
yes
<-- =IF(B38=G11-B21,"yes","no")
w

[2] Page 281, text below second spreadsheet picture:

Instead of: regress the betas of the assets on their mean returns
Should be: regress the mean returns of the assets on their betas

[1] Page 281 , spreadsheet at bottom of page needs to be replaced with the
following (theres an error in cell B42):
A
B
C
D
E
Check Propositions 3 & 4: Step 2 coefficients should be:
41 Intercept = c, Slope = E(rw) - c
42 Intercept = c ?
yes
<-- =IF(ROUND(B37-B21,10)=0,"yes","no")
43 Slope = E(rw) - c ?
yes
<-- =IF(B38=G11-B21,"yes","no")

FM3, cumulative typos

Page 10

[1] Page 282, same error in spreadsheet on bottom of page. Should be:
A

ILLUSTRATING PROPOSITIONS 3-5

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

This time the constant is 2% (cell B21)

Dates
1
2
3
4
5
6
7

Asset 1
-6.63%
8.53%
1.79%
7.25%
0.75%
-1.57%
-2.10%

Mean

Asset 2
-2.49%
2.44%
4.46%
17.90%
-8.22%
0.83%
5.14%

Asset 3
-4.27%
-3.15%
1.92%
-6.53%
-1.76%
12.88%
13.41%

1.15%

2.87%

1.79%

Variance-covariance matrix
Asset 1
Asset 1
0.0024
Asset 2
0.0019
Asset 3
-0.0015
Asset 4
-0.0024

Asset 2
0.0019
0.0056
-0.0007
-0.0016

Asset 3
-0.0015
-0.0007
0.0057
-0.0005

Asset 4
11.72%
-8.33%
19.18%
-7.41%
-1.44%
-5.92%
-0.46%

Efficient portfolio w
-2.95%
3.64%
5.16%
-2.40%
2.24%
0.01%
-0.26%

1.05% <-- =AVERAGE(E3:E9)

<-- {=MMULT(B3:E9,B23:B26)}

0.78%

Asset 4
-0.0024 <-- {=MMULT(TRANSPOSE(B3:E9-B11:E11),B3:E9-B11:E11)/7}
-0.0016
-0.0005
0.0094

Finding an efficient portfolio w

Constant
2.00%
Asset 1
Asset 2
Asset 3
Asset 4

0.8234 <-- {=MMULT(MINVERSE(B15:E18),TRANSPOSE(B11:E11)-B21)/SUM(MMULT(MINVERSE(B15:E18),TRANSPOSE(B11:E11)-B21))}

-0.2869
0.2278
0.2357

Implementing propositions 3-5--finding the SML

Step 1: Regress each asset's returns on those of the efficient portfolio w
Asset 1
Asset 2
Asset 3
Asset 4
Alpha
0.0061
0.0342
0.0165
0.0044 <-- =INTERCEPT(E3:E9,$G$3:$G$9)
Beta
0.6968
-0.7075
0.1752
0.7776 <-- =SLOPE(E3:E9,$G$3:$G$9)
R-squared
0.1570
0.0709
0.0042
0.0506 <-- =RSQ(E3:E9,$G$3:$G$9)
Step 2: Regress the asset mean returns on their betas
Intercept
0.02 <-- =INTERCEPT(B11:E11,B33:E33)
Slope
-0.0122 <-- =SLOPE(B11:E11,B33:E33)
R-squared
1.0000 <-- =RSQ(B11:E11,B33:E33)

Check Propositions 3 & 4: Step 2 coefficients should be:

41 Intercept = c, Slope = E(rw) - c
42 Intercept = c ?
yes
<-- =IF(ROUND(B37-B21,10)=0,"yes","no")
43 Slope = E(rw) - c ?
yes
<-- =IF(B38=G11-B21,"yes","no")

[1] page 301: Picture should be replaced by following (theres a non-critical error
in row 17):
A
1
2
GE
3
MSFT
4
JNJ
5
K
6
BA
7
IBM
8
9
10 Risk-free rate
11

COMPUTING AN EFFICIENT PORTFOLIO

GE
0.1035
0.0758
0.0222
-0.0043
0.0857
0.0123

MSFT
0.0758
0.1657
0.0412
-0.0052
0.0379
-0.0022

JNJ
0.0222
0.0412
0.0360
0.0181
0.0101
-0.0039

K
-0.0043
-0.0052
0.0181
0.0570
-0.0076
-0.0046

BA
0.0857
0.0379
0.0101
-0.0076
0.0896
0.0248

IBM
0.0123
-0.0022
-0.0039
-0.0046
0.0248
0.0184

Means
23.66%
21.38%
18.43%
5.51%
27.63%
17.63%

2%

The efficient portfolio is computed by the array formula

{=TRANSPOSE(MMULT(MINVERSE(B3:G8),I3:I8-B10)/SUM(MMULT(MINVERSE(B3:G8),I3:I8-B10)))}.
12 The cells below use TRANSPOSE( ) to make this a row vector.
GE
MSFT
JNJ
K
BA
IBM
13
14 Efficient portfolio
26.37%
-6.05%
36.98%
-4.81% -33.87%
81.39%
15
16 Market value ($billion)
336.44
305.82
152.93
15.44
41.01
16.98
17 Market proportions
38.73%
35.21%
17.61%
1.78%
4.72%
1.96% <-- =G16/SUM($B$16:$G$16)

FM3, cumulative typos

Page 11

[2] Page 303, the picture should be replaced with the following:
A

THE CORRELATION MATRIX

1
Variance-covariance
matrix
2
GE
MSFT
JNJ
K
BA
3
0.1035
GE
4
0.0758
0.0222
-0.0043
0.0857
MSFT
5
0.0758 0.1657
0.0412
-0.0052
0.0379

IBM
0.0123
-0.0022

0.0412

0.0360

0.0181

0.0101

-0.0039

-0.0052

0.0181

0.0570

-0.0076

-0.0046

0.0857

0.0379

0.0101

-0.0076

0.0896

0.0248

0.0123

-0.0022

-0.0039

-0.0046

0.0248

0.0184

JNJ

0.0222

-0.0043

BA

IBM

10

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

The range below computes the correlation coefficients based on the formula
=C4/SQRT(INDEX($B$4:$G$9,C$13,C$13)*INDEX($B$4:$G$9,$A14,$A14)).
The correlations on the diagonal (all = 1) are not shown. To make the formula work, we have
labeled the rows and columns from 1 to 6.
GE
MSFT
JNJ
K
BA
IBM
1
2
3
4
5
6
1
GE
0.5791
0.3632
-0.0560
0.8905
0.2819
2
0.5340
-0.0532
0.3113
-0.0406 MSFT
3
JNJ
0.4002
0.1780
-0.1529
4
K
-0.1067
-0.1427
5
BA
0.6116
IBM
Largest correlation
0.8905 <-- =MAX(B14:G18)
2nd largest correlation
0.6116 <-- =LARGE(B14:G18,2)
3rd largest correlation
0.5791 <-- =LARGE(B14:G18,3)
4th largest correlation
0.5340 <-- =LARGE(B14:G18,4)
5th largest correlation
0.4002
6th largest correlation
0.3632
7th largest correlation
0.3113
8th largest correlation
0.2819
9th largest correlation
0.1780
Smallest correlation
-0.1529 <-- =MIN(B14:G18)
Average correlation
0.2398 <-- =AVERAGE(C14:G18)

Number of
correlations greater
32 than 0.5

4 <-- =COUNTIF(B14:G18,">0.5")

[2] Page 306, 2nd line from bottom:

Instead of: for the 10 stocks
Should be: for the six stocks
[2] Page 307, the picture should be replaced by:

FM3, cumulative typos

Page 12

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

ESTIMATING THE VARIANCE-COVARIANCE MATRIX USING

THE CONSTANT-CORRELATION APPROACH
Return data
Date
3-Jan-94
3-Jan-95
2-Jan-96
2-Jan-97
2-Jan-98
4-Jan-99
3-Jan-00
2-Jan-01
2-Jan-02
2-Jan-03
2-Jan-04
Average
Standard deviation
Variance
Average correlation

GE
56.44%
18.23%
56.93%
42.87%
47.11%
34.55%
28.15%
4.61%
-19.74%
-44.78%
35.90%

MSFT
-1.50%
33.21%
44.28%
79.12%
38.04%
85.25%
11.20%
-47.19%
4.27%
-29.47%
18.01%

JNJ
6.01%
41.56%
57.71%
22.94%
17.62%
26.62%
3.41%
10.69%
23.11%
-5.67%
-1.27%

K
-9.79%
7.46%
37.76%
-5.09%
32.04%
-10.74%
-48.93%
11.67%
19.90%
10.88%
15.49%

BA
58.73%
-0.24%
65.55%
54.34%
37.11%
15.05%
43.53%
28.29%
-15.09%
-23.23%
39.82%

23.66%
21.38%
18.43%
5.51%
27.63%
32.17%
40.71%
18.97%
23.86%
29.93%
0.1035
0.1657
0.0360
0.0570
0.0896
0.2398 <-- =(AVERAGE(B23:G28)-1/6)*(36/30)

IBM
21.51%
6.04%
27.33%
41.08%
2.63%
-2.11%
23.76%
21.76%
4.55%
15.54%
31.80%
17.63% <-- =AVERAGE(G4:G14)
13.56% <-- =STDEV(G4:G14)
0.0184 <-- =VAR(G4:G14)

Uses the array formula {=MMULT(TRANSPOSE(B4:G14-B16:G16),B4:G1421 B16:G16)/10/MMULT(TRANSPOSE(B17:G17),B17:G17)} to compute the correlations.

GE
MSFT
JNJ
K
BA
IBM
22
GE
23
1.0000
0.5791
0.3632
-0.0560
0.8905
0.2819
MSFT
24
0.5791
1.0000
0.5340
-0.0532
0.3113
-0.0406
JNJ
25
0.3632
0.5340
1.0000
0.4002
0.1780
-0.1529
K
26
-0.0560
-0.0532
0.4002
1.0000
-0.1067
-0.1427
BA
27
0.8905
0.3113
0.1780
-0.1067
1.0000
0.6116
IBM
28
0.2819
-0.0406
-0.1529
-0.1427
0.6116
1.0000

[2] Page 308, picture should be replaced by:

FM3, cumulative typos

Page 13

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

ESTIMATING THE VARIANCE-COVARIANCE MATRIX USING

THE CONSTANT-CORRELATION APPROACH
The constant correlation is set as r = 0.3
Return data
Date
3-Jan-94
3-Jan-95
2-Jan-96
2-Jan-97
2-Jan-98
4-Jan-99
3-Jan-00
2-Jan-01
2-Jan-02
2-Jan-03
2-Jan-04
Average
Standard deviation
Variance
Constant correlation

GE
56.44%
18.23%
56.93%
42.87%
47.11%
34.55%
28.15%
4.61%
-19.74%
-44.78%
35.90%

MSFT
-1.50%
33.21%
44.28%
79.12%
38.04%
85.25%
11.20%
-47.19%
4.27%
-29.47%
18.01%

JNJ
6.01%
41.56%
57.71%
22.94%
17.62%
26.62%
3.41%
10.69%
23.11%
-5.67%
-1.27%

K
-9.79%
7.46%
37.76%
-5.09%
32.04%
-10.74%
-48.93%
11.67%
19.90%
10.88%
15.49%

BA
58.73%
-0.24%
65.55%
54.34%
37.11%
15.05%
43.53%
28.29%
-15.09%
-23.23%
39.82%

23.66%
21.38%
18.43%
5.51%
27.63%
32.17%
40.71%
18.97%
23.86%
29.93%
0.1035
0.1657
0.0360
0.0570
0.0896
0.3000 <-- This is an educated guesstimate

IBM
21.51%
6.04%
27.33%
41.08%
2.63%
-2.11%
23.76%
21.76%
4.55%
15.54%
31.80%
17.63% <-- =AVERAGE(G4:G14)
13.56% <-- =STDEV(G4:G14)
0.0184 <-- =VAR(G4:G14)

Uses the array formula {=IF(A23:A28=B22:G22,B18:G18,MMULT(TRANSPOSE(B17:G17),B17:G17)*B19)} to

21 compute the constant correlation matrix
GE
MSFT
JNJ
K
BA
IBM
22
GE
23
0.1035
0.0393
0.0183
0.0230
0.0289
0.0131
MSFT
24
0.0393
0.1657
0.0232
0.0291
0.0366
0.0166
JNJ
25
0.0183
0.0232
0.0360
0.0136
0.0170
0.0077
K
26
0.0230
0.0291
0.0136
0.0570
0.0214
0.0097
BA
27
0.0289
0.0366
0.0170
0.0214
0.0896
0.0122
IBM
28
0.0131
0.0166
0.0077
0.0097
0.0122
0.0184

[2] Page 309: The picture should be replaced by:

FM3, cumulative typos

Page 14

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

ESTIMATING THE VARIANCE-COVARIANCE MATRIX USING

THE SHRINKAGE APPROACH
Gives weight 0.30 (the shrinkage factor) to sample var-cov and
weight 0.70 to a diagonal matrix of only variances
Return data
Date
3-Jan-94
3-Jan-95
2-Jan-96
2-Jan-97
2-Jan-98
4-Jan-99
3-Jan-00
2-Jan-01
2-Jan-02
2-Jan-03
2-Jan-04

GE
56.44%
18.23%
56.93%
42.87%
47.11%
34.55%
28.15%
4.61%
-19.74%
-44.78%
35.90%

MSFT
-1.50%
33.21%
44.28%
79.12%
38.04%
85.25%
11.20%
-47.19%
4.27%
-29.47%
18.01%

JNJ
6.01%
41.56%
57.71%
22.94%
17.62%
26.62%
3.41%
10.69%
23.11%
-5.67%
-1.27%

K
-9.79%
7.46%
37.76%
-5.09%
32.04%
-10.74%
-48.93%
11.67%
19.90%
10.88%
15.49%

BA
58.73%
-0.24%
65.55%
54.34%
37.11%
15.05%
43.53%
28.29%
-15.09%
-23.23%
39.82%

Average
Standard deviation
Variance

23.66%
32.17%
0.1035

21.38%
40.71%
0.1657

18.43%
18.97%
0.0360

5.51%
23.86%
0.0570

27.63%
29.93%
0.0896

Shrinkage factor

IBM
21.51%
6.04%
27.33%
41.08%
2.63%
-2.11%
23.76%
21.76%
4.55%
15.54%
31.80%
17.63% <-- =AVERAGE(G4:G14)
13.56% <-- =STDEV(G4:G14)
0.0184 <-- =VAR(G4:G14)

0.3 <-- This is the weight put on the sample var-cov

Shrinkage matrix
22 Uses the array formula {=B20*B34:G39+(1-B20)*B44:G49} to compute the shrinkage covariance matrix
GE
MSFT
JNJ
K
BA
IBM
23
GE
24
0.1035
0.0228
0.0066
-0.0013
0.0257
0.0037
MSFT
25
0.0228
0.1657
0.0124
-0.0016
0.0114
-0.0007
JNJ
26
0.0066
0.0124
0.0360
0.0054
0.0030
-0.0012
K
27
-0.0013
-0.0016
0.0054
0.0570
-0.0023
-0.0014
BA
28
0.0257
0.0114
0.0030
-0.0023
0.0896
0.0074
IBM
29
0.0037
-0.0007
-0.0012
-0.0014
0.0074
0.0184
30
31
Uses the array formula {=MMULT(TRANSPOSE(B4:G14-B16:G16),B4:G14-B16:G16)/10} to compute the constant
32 sample covariance matrix. In the shrinkage var-cov, this matrix is given weight lambda.
GE
MSFT
JNJ
K
BA
IBM
33
GE
34
0.1035
0.0758
0.0222
-0.0043
0.0857
0.0123
MSFT
35
0.0758
0.1657
0.0412
-0.0052
0.0379
-0.0022
JNJ
36
0.0222
0.0412
0.0360
0.0181
0.0101
-0.0039
K
37
-0.0043
-0.0052
0.0181
0.0570
-0.0076
-0.0046
BA
38
0.0857
0.0379
0.0101
-0.0076
0.0896
0.0248
IBM
39
0.0123
-0.0022
-0.0039
-0.0046
0.0248
0.0184
40
41
Uses the array formula {=MMULT(TRANSPOSE(B4:G14-B16:G16),B4:G14-B16:G16)/10*IF(A44:A49=B43:G43,1,0)}
to compute a matrix with only variances on diagonal and zeros elsewhere. In the shrinkage var-cov this matrix is
42 given weight 1-lambda.
GE
MSFT
JNJ
K
BA
IBM
43
GE
44
0.1035
0.0000
0.0000
0.0000
0.0000
0.0000
MSFT
45
0.0000
0.1657
0.0000
0.0000
0.0000
0.0000
JNJ
46
0.0000
0.0000
0.0360
0.0000
0.0000
0.0000
K
47
0.0000
0.0000
0.0000
0.0570
0.0000
0.0000
BA
48
0.0000
0.0000
0.0000
0.0000
0.0896
0.0000
IBM
49
0.0000
0.0000
0.0000
0.0000
0.0000
0.0184

[2] Page 313: The picture on this page should be replaced by:

FM3, cumulative typos

Page 15

COMPUTING THE GLOBAL MINIMUM VARIANCE PORTFOLIO

USING CONSTANT CORRELATION MODEL

1
Return data
2
Date
GE
MSFT
JNJ
K
BA
IBM
3
4
3-Jan-94
56.44%
-1.50%
6.01%
-9.79%
58.73%
7.74%
5
3-Jan-95
18.23%
33.21%
41.56%
7.46%
-0.24% -12.16%
6
2-Jan-96
56.93%
44.28%
57.71%
37.76%
65.55%
30.00%
7
2-Jan-97
42.87%
79.12%
22.94%
-5.09%
54.34% -41.78%
8
2-Jan-98
47.11%
38.04%
17.62%
32.04%
37.11%
47.32%
9
4-Jan-99
34.55%
85.25%
26.62%
-10.74%
15.05%
37.70%
10
3-Jan-00
28.15%
11.20%
3.41%
-48.93%
43.53% -13.32%
11
2-Jan-01
4.61% -47.19%
10.69%
11.67%
28.29% -78.39%
12
2-Jan-02
-19.74%
4.27%
23.11%
19.90% -15.09% -25.16%
13
2-Jan-03
-44.78% -29.47%
-5.67%
10.88% -23.23% -137.03%
14
2-Jan-04
35.90%
18.01%
-1.27%
15.49%
39.82%
16.44%
15
16
Average
23.66%
21.38%
18.43%
5.51%
27.63% -15.33% <-- =AVERAGE(G4:G14)
17 Standard deviation
32.17%
40.71%
18.97%
23.86%
29.93%
54.71% <-- =STDEV(G4:G14)
18
Variance
0.1035
0.1657
0.0360
0.0570
0.0896
0.2993 <-- =VAR(G4:G14)
19 Constant correlation
0.3000
20
Uses the array formula {=IF(A23:A28=B22:G22,B18:G18,MMULT(TRANSPOSE(B17:G17),B17:G17)*B19)}
21 to compute the constant correlation matrix
GE
MSFT
JNJ
K
BA
IBM
22
GE
23
0.1035
0.0393
0.0183
0.0230
0.0289
0.0528
MSFT
24
0.0393
0.1657
0.0232
0.0291
0.0366
0.0668
JNJ
25
0.0183
0.0232
0.0360
0.0136
0.0170
0.0311
K
26
0.0230
0.0291
0.0136
0.0570
0.0214
0.0392
BA
27
0.0289
0.0366
0.0170
0.0214
0.0896
0.0491
IBM
28
0.0528
0.0668
0.0311
0.0392
0.0491
0.2993
29

30
31
32
33
34
35
36

Uses formula {=MMULT(MINVERSE(B23:G28),IF(A31:A36=A31:A36,1,0))/SUM(MMULT(MINVERSE(B23:G28),IF(A31:A36=A31:A36,1,0)))} to

compute the global minimum variance portfolio
GE
MSFT
JNJ
K
BA
IBM

0.0800
0.0030
0.5645
0.2782
0.1152
-0.0409

GMVP statistics
Mean return
17.71% <-- =MMULT(B16:G16,B31:B36)
Variance
0.4027 <-- {=MMULT(MMULT(TRANSPOSE(B31:B36),B4:G9),B31:B36)}
Sigma
63.46% <-- =SQRT(F35)

[1] Page 315, exercise 2:

answer is given below:
A
21
22
23
24
25
26
27

La-Z-Boy Kimball Flexsteel

La-Z-Boy
Kimball
Flexsteel
Leggett & Platt
Herman Miller
Shaw Industries

0.1267
0.1368
0.0936
0.1224
0.1224
0.2016

0.1368
0.0713
0.1112
0.1454
0.1454
0.2394

FM3, cumulative typos

0.0936
0.1112
0.3667
0.0995
0.0995
0.1638

The formula for the answer is wrong.

The correct

E
F
G
H
I
J
K
L
M
N
Leggett Herman
Shaw
& Platt
Miller Industries
0.1224
0.1224
0.2016 <-- {=IF(B21:G21=A22:A27,B18:G18,MMULT(TRANSPOSE(B15:G15),B15:G15)*B19)}
0.1454
0.1454
0.2394
0.0995
0.0995
0.1638
0.1136
0.1301
0.2142
0.1301
0.0654
0.2142
0.2142
0.2142
0.1819

Page 16

[2] Page 314: Top picture should be the following:

A

Return data

3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

Date
3-Jan-94
3-Jan-95
2-Jan-96
2-Jan-97
2-Jan-98
4-Jan-99
3-Jan-00
2-Jan-01
2-Jan-02
2-Jan-03
2-Jan-04

GE
56.44%
18.23%
56.93%
42.87%
47.11%
34.55%
28.15%
4.61%
-19.74%
-44.78%
35.90%

MSFT
-1.50%
33.21%
44.28%
79.12%
38.04%
85.25%
11.20%
-47.19%
4.27%
-29.47%
18.01%

JNJ
6.01%
41.56%
57.71%
22.94%
17.62%
26.62%
3.41%
10.69%
23.11%
-5.67%
-1.27%

K
-9.79%
7.46%
37.76%
-5.09%
32.04%
-10.74%
-48.93%
11.67%
19.90%
10.88%
15.49%

BA
58.73%
-0.24%
65.55%
54.34%
37.11%
15.05%
43.53%
28.29%
-15.09%
-23.23%
39.82%

Average
Standard deviation
Variance

23.66%
32.17%
0.1035

21.38%
40.71%
0.1657

18.43%
18.97%
0.0360

5.51%
23.86%
0.0570

27.63%
29.93%
0.0896

31
32
33
34
35
36
37

COMPUTING THE GLOBAL MINIMUM VARIANCE PORTFOLIO

USING A SHRINKAGE VARIANCE-COVARIANCE MATRIX

22
23
24
25
26
27
28
29
30

Shrinkage factor

IBM
21.51%
6.04%
27.33%
41.08%
2.63%
-2.11%
23.76%
21.76%
4.55%
15.54%
31.80%
17.63% <-- =AVERAGE(G4:G14)
13.56% <-- =STDEV(G4:G14)
0.0184 <-- =VAR(G4:G14)

0.3 <-- This is the weight put on the sample var-cov

Shrinkage matrix
Uses the array formula {=B20*MMULT(TRANSPOSE(B4:G14-B16:G16),B4:G14-B16:G16)/10+(1-B20)*MMULT(TRANSPOSE(B4:G14-B16:G16),B4:G14B16:G16)/10*IF(A24:A29=B23:G23,1,0)}
to compute the shrinkage covariance matrix
GE
MSFT
JNJ
K
BA
IBM
GE
0.1035
0.0228
0.0066
-0.0013
0.0257
0.0037
MSFT
0.0228
0.1657
0.0124
-0.0016
0.0114
-0.0007
JNJ
0.0066
0.0124
0.0360
0.0054
0.0030
-0.0012
K
-0.0013
-0.0016
0.0054
0.0570
-0.0023
-0.0014
BA
0.0257
0.0114
0.0030
-0.0023
0.0896
0.0074
IBM
0.0037
-0.0007
-0.0012
-0.0014
0.0074
0.0184
Uses formula {=MMULT(MINVERSE(B24:G29),IF(A32:A37=A32:A37,1,0))/SUM(MMULT(MINVERSE(B24:G29),IF(A32:A37=A32:A37,1,0)))} to compute
the global minimum variance portfolio
GE
MSFT
JNJ
K
BA
IBM

0.0407
0.0337
0.2261
0.1556
0.0412
0.5027

FM3, cumulative typos

GMVP statistics
Mean return
Variance
Sigma

16.71% <-- {=MMULT(B16:G16,B32:B37)}

0.0092 <-- {=MMULT(MMULT(TRANSPOSE(B32:B37),B24:G29),B32:B37)}
9.59% <-- =SQRT(F36)

Page 17

[2] Page 314: Bottom picture should be the following:

J

BA

IBM

Data table: varying the shrinkage factor

2
GMVP
mean

3
4
5
6
7
8
9
10
11
12
13
14
15

0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

GMVP
sigma

17.64%
17.29%
16.98%
16.71%
16.46%
16.24%
16.03%
15.81%
15.56%
15.15%
12.73%

8.89%
9.19%
9.42%
9.59%
9.71%
9.77%
9.79%
9.75%
9.63%
9.35%
7.73%

GE

MSFT

JNJ

0.0763
0.0630
0.0511
0.0407
0.0319
0.0251
0.0214
0.0232
0.0379
0.0952
0.6105

0.0477
0.0420
0.0374
0.0337
0.0308
0.0286
0.0268
0.0247
0.0209
0.0087
-0.1034

0.2196
0.2216
0.2238
0.2261
0.2287
0.2316
0.2349
0.2383
0.2415
0.2422
0.2074

K
0.1387
0.1467
0.1523
0.1556
0.1568
0.1559
0.1528
0.1470
0.1378
0.1217
0.0539

0.0882
0.0726
0.0571
0.0412
0.0243
0.0055
-0.0168
-0.0457
-0.0894
-0.1807
-0.7704

0.4295
0.4541
0.4783
0.5027
0.5274
0.5533
0.5811
0.6124
0.6513
0.7130
1.0019

[2] Page 316, exercise 4 answer on disk: The formula in cells Editor:
B11:B16 Page
should316 typo
will go into the files on
be:
the disk
Instead of:
=TRANSPOSE(MMULT(TRANSPOSE(K2:K7),B2:G7)/MMULT(MMULT(TRANSPOSE
(K2:K7),B2:G7),
K2:K7))
Should be:
=TRANSPOSE(MMULT(TRANSPOSE(K2:K7),MINVERSE(B2:G7))/MMULT(MMULT(
TRANSPOSE(K2:K7),MINVERSE(B2:G7)),K2:K7))

[1] Page 344, Chapter 12: The screen clip does not include all the data. The
correct clip should be:
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

PORTFOLIO OPTIMIZATION WITHOUT SHORT SALES

Variance-covariance matrix
0.10
0.03
0.03
0.20
-0.08
0.02
0.05
0.03
c

x1
x2
x3
x4
Total
Portfolio mean
Portfolio sigma
Theta

-0.08
0.02
0.30
0.20

0.05
0.03
0.20
0.90

16.0% <-- This is the constant

Means
8%
9%
10%
11%

Ctrl+A works the VBA program

which calculates efficient
portfolios for no-short sales.
This program iteratively
substitutes a constant ranging
from -3.5% 'till 16% (1/2%
jumps) and calculates the
optimal portfolio.

0.0000
0.0000
0.0000
1.0000
1.0000 <-- =SUM(B11:B14)
11.00% <-- {=MMULT(TRANSPOSE(B11:B14),G3:G6)}
94.87% <-- {=SQRT(MMULT(TRANSPOSE(B11:B14),MMULT(B3:E6,B11:B14)))}
-5.27% <-- =(portfolio_mean-C8)/Portfolio_sigma

FM3, cumulative typos

J
RESULTS
c
-0.035
-0.03
-0.025
-0.02
-0.015
-0.01
-0.005
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
0.045
0.05
0.055
0.06
0.065
0.07
0.075

K
Sigma
20.24%
20.25%
20.25%
20.25%
20.25%
20.26%
20.26%
20.27%
20.27%
20.28%
20.29%
20.30%
20.31%
20.32%
20.34%
20.37%
20.41%
20.46%
20.54%
20.67%
20.90%
21.36%
23.27%

L
Mean
8.70%
8.70%
8.70%
8.71%
8.71%
8.71%
8.71%
8.71%
8.71%
8.72%
8.72%
8.72%
8.73%
8.73%
8.74%
8.74%
8.75%
8.76%
8.78%
8.80%
8.82%
8.87%
9.01%

M
x1
0.6049
0.6042
0.6035
0.6027
0.6017
0.6007
0.5994
0.5982
0.5968
0.5950
0.5932
0.5910
0.5885
0.5856
0.5821
0.5779
0.5726
0.5659
0.5572
0.5452
0.5277
0.4992
0.4267

N
x2
0.0885
0.0887
0.0890
0.0893
0.0897
0.0901
0.0908
0.0912
0.0917
0.0926
0.0934
0.0943
0.0953
0.0965
0.0980
0.0998
0.1019
0.1047
0.1083
0.1133
0.1205
0.1324
0.1630

O
x3
0.3066
0.3070
0.3075
0.3080
0.3086
0.3092
0.3098
0.3106
0.3115
0.3123
0.3134
0.3147
0.3161
0.3179
0.3199
0.3224
0.3255
0.3294
0.3345
0.3415
0.3518
0.3684
0.3856

P
x4
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0248

Page 18

[1] Page 361, formula at bottom of page:

Instead of: rHD ,opinion adjusted = rHD ,market +

Should be: rHD ,opinion adjusted = rHD ,market +

Cov ( rHD ,GM )

Var ( rHD )

GM = 1.11%

Cov ( rHD , rGM )

GM = 1.11%
Var ( rGM )

[1] Page 362, formula at top of page:

Instead of: rIP ,opinion adjusted = rIP ,market +

Should be: rIP ,opinion adjusted = rIP ,market +

Cov ( rIP ,GM )

Var ( rIP )

GM = 0.86%

Cov ( rIP , rGM )

GM = 0.86%
Var ( rGM )

[1] Page 367: The screen clip has a mistake in the formulas in B29:B33. Should
be:
A
B
C
D
E
F
25 Risk-free rate
5.00%
Expected return on
26 S&P 500
12.00%
27
28 Black-Litterman implied returns
29 S&P 500
12.00%
<-- {=MMULT(B14:F18,H4:H8)*(B26MSCI
World
ex-US
30
12.97%
B25)/INDEX((MMULT(B14:F18,H4:H8)),1,1)+B25}
31 Russell 2000
13.30%
32 MSCI Emerging
14.45%
33 LB Global aggregate
5.76%

[1] Page 367, four lines up from bottom. The same mistake should be corrected:
Instead of:
=MMULT(B14:F18,H4:H8)*(B26B12)/INDEX((MMULT(B14:F18,H4:H8)),1,1)+B12
Should be:
=MMULT(B14:F18,H4:H8)*(B26B25)/INDEX((MMULT(B14:F18,H4:H8)),1,1)+B25

FM3, cumulative typos

Page 19

[1] Page 402: Cell B9 in the spreadsheet should be T . For the particular
example given this makes no difference, but to make things correct:
A

1
2
3
4
5
6
7
8
9
10
11
12

QUANTILES FOR LOGNORMAL

DISTRIBUTION
Initial value, V0
Mean,
Sigma,
Time period, T

100
10%
30%
1 <-- in years

Parameters of normal distribution of ln(VT)

Mean
4.6602 <-- =LN(B2)+(B3-B4^2/2)*B5
Sigma
0.3000 <-- =B4*SQRT(B5)
Cutoff
VaR at 1% level

52.576 <-- =LOGINV(0.01,B8,B9)

47.424 <-- =B2-B11

[1] Page 404, screen from spreadsheet contains wrongly-identified cells (the
actual computations are correct). Screen should be:
A

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

VaR FOR 3 ASSET PROBLEM

Asset 1
Asset 2
Asset 3
Initial investment
Mean return
Portfolio sigma
Mean investment value
Sigma of investment value
Cutoff
Cumulative PDF
VaR at 1.00% level

18

Mean
returns
10%
12%
13%

Variance-covariance matrix
0.10
0.04
0.03

0.04
0.20
-0.04

0.03
-0.04
0.60

Portfolio
proportions
0.30
0.25
0.45

100
0.1185 <-- {=MMULT(TRANSPOSE(B3:B5),H3:H5)}
0.3848 <-- {=SQRT(MMULT(MMULT(TRANSPOSE(H3:H5),D3:F5),H3:H5))}
111.8500
38.4838
22.3234 <-- =NORMINV(0.01,(1+B8)*B7,B9*B7)
0.01 <-- =NORMDIST(B14,B11,B12,TRUE)
77.6766 <-- =B7-B14
Note that the functions in cells B8 and B9 are array
functions: You must press [Ctrl]+[Shift]+[Enter] when
after you write the function in the cell. The curly
brackets {} are not written--they appear automatically.

[2] Page 428, 2nd bullet, line 3 & 4: The word purchaser (split between these two
lines) is mispelled (a is left out).

FM3, cumulative typos

Page 20

[2] Page 439: Table contains two errors:

Under Cash Flow heading, line 2: should be +De-rt instead of +De-rT
(meaning: lower-case t instead of upper case T)
Under Cash Flow heading, line 5: Same error. The formula as a whole
should read:
-S0 + De-rt +
Xe-rT + C0

[2] Page 456, equation at bottom of page:

Instead of: qD *0 + qD * 2.96 = 0.6531*0 + 0.2903* 2.96 = 0.8578
Should be: qU *0 + qD * 2.9550 = 0.6531*0 + 0.2903* 2.9550 = 0.8578

[1] Disk, pages 485-488: Tabs wrongly numbered!

[1] Page 492, footnote 4:

Instead of:

dS
= dt + dB
S

dS
2
= +
dt + dB
Should be:
S
2

[1] Page 496, correct screen clip given below (was a typo in cell F3):

FM3, cumulative typos

Page 21

D
List of 1000 normally
distributed numbers

2
Mean
Sigma
t

15%
30%
1

200
180
160
140
120
100
80
60
40
20
0

Lognormal
exp(t+ Z t)

1.4446
0.9258
1.1810
1.8868
1.1587
1.6312
2.4972
1.0842
1.6123

<-=EXP($B$3*$B$5+$B
$4*D3*SQRT($B$5))

Lognormal Frequency Distribution

-2.794113243
0.5025
0.724598976
1.4439
0.433137757
1.3231
-1.047612841
0.8485
1.33371941
1.7335
-1.690195859
0.6997
-2.084398147
0.6217
0.022914719
1.1698
-0.045977231
1.1459
0.344841737
1.2885
-0.001750777
1.1612
1.038474693
1.5865
0.609766175
1.3950
0.356371856
1.2929
2.100914571
2.1821
-0.989200544
0.8635
-0.960726538
0.8709

0
.4
2
5
.2
0
.1
2
5
.9
1
0
.8
1
5
.6
1
0
.5
1
5
.3
1
0
.2
1
5
.0
1
0
.9
.0
5
7

We used Tools|DataAnalysis|
RandomNumberGeneration to
produce the list of 1,000 normally
distributed random numbers (with
12 mean =0 and standard deviation =
13 1) on the right.
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

0.726111011
-0.75691446
0.054451448
1.616244845
-0.009147243
1.130981673
2.550623321
-0.230678552
1.092166713

y
c
n
e
u
q
r
F

3
4
5
6
7
8
9
10
11

Bins

Frequency

0.00
0.15
0.30
0.45
0.60
0.75
0.90
1.05
1.20

0
0
0
0
8
70
132
162
181

1.35
1.50
1.65
1.80
1.95
2.10
2.25
2.40

139
113
74
53
25
16
10
5

The Lognormal Histogram

The table above created

with the array formula
{=FREQUENCY(E3:E1002,
H3:H19)}

[1] Page 505, footnote:

Instead of: is discussed in Chapter 30, section 3
Should be: is discussed in Chapter 29, section 4

[2] Page 519: In the VBA box CallOption should be BSCall so that line 6 should
be:
Instead of: If CallOption(Stock, Exercise, Time, Interest,
Should be: If BSCall(Stock, Exercise, Time, Interest,

[1] Page 538, cell C3 should say Exercise price instead of Exercise prie:

FM3, cumulative typos

Page 22

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

"BANG FOR THE BUCK" WITH OPTIONS

S
X
r
T
Sigma

25
25
6.00%
0.5
30%

d1
d2

0.2475 <-- (LN(S/X)+(r+0.5*sigma^2)*T)/(sigma*SQRT(T))

0.0354 <-- d1-sigma*SQRT(T)

N(d1)
N(d2)

0.5977 <-- Uses formula NormSDist(d1)

0.5141 <-- Uses formula NormSDist(d2)

Call price
Put price
Call bang
Put bang

Current stock price

Exercise price
Risk-free rate of interest
Time to maturity of option (in years)
Stock volatility

2.47 <-- S*N(d1)-X*exp(-r*T)*N(d2)

1.73 <-- call price - S + X*Exp(-r*T): by put-call parity
6.0483 <-- =B11*B2/B14
5.8070 <-- =NORMSDIST(-B8)*B2/B15

[2] Page 542, spreadsheet clip should look like this:

A

1
2
3
4
5
6
7
8

USING THE BLACK (1976) MODEL

TO PRICE A BOND OPTION
F
X
r
T
Sigma
d1

133.011
130.000
4.00%
0.5
6%

<-- Bond forward price

<-- Exercise price
<--Risk-free rate of interest
<-- Bond forward price volatility,

0.5609 <-- =(LN(B2/B3)+B6^2*B5/2)/(B6*SQRT(B5))

9 d2
10
11 Call price
12 Put price

0.5185 <-- =B8-SQRT(B5)*B6

3.97 <-- =EXP(-B4*B5)*(B2*NORMSDIST(B8)-B3*NORMSDIST(B9))
1.02 <-- =EXP(-B4*B5)*(B3*NORMSDIST(-B9)-B2*NORMSDIST(-B8))

[2] Page 542, line below spreadsheet clip:

Instead of: is worth 4.13
Should be: is worth 3.97

FM3, cumulative typos

Page 23

[3] Page 609. The last two lines of the VBA code are missing. After Next Index
(shown below) end of the program should read as below. The program on the disk
for Chapter 22 is correct.
Next Index
SuccessfulRuns = Success / Runs
End Function

[2] Page 679, replace spreadsheet picture with following:

A

EFFECT OF MATURITY ON DURATION

Current date
Maturity, in years
Maturity date
YTM
Coupon
Face value
Duration

5/21/1996 <-- =DATE(1996,5,21)

21
5/21/2017 <-- =DATE(1996+B3,5,21)
15% Yield to maturity (i.e., discount rate)
4%
1,000
9.0110 <-- =DURATION(B2,B4,B6,B5,1)

Data table: Effect of maturity on duration

9.0110 <-- =B9 , data table header
1
1.0000
5
4.5163
10
Bond maturity -->
10
7.4827
9
15
8.8148
20
9.0398
8
25
8.7881
7
30
8.4461
6
40
7.9669
5
50
7.7668
4
60
7.6977
70
7.6759
3
80
7.6693
2

Effect of Maturity on Duration

Coupon rate = 4.0%, YTM = 15.00%

Duration

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

1
0

10

20

30

40

50

60

70

80

Maturity

[2] Page 698, last line:

Instead

* DurationBond 1 + ( 1 ) * DurationBond 2 = 7.6655 + 14.6361( 1 ) = 0.6551

of:

Should be: * DurationBond 1 + ( 1 ) * DurationBond 3 = 7.6655 + 14.6361( 1 ) = 10

[2] Page 700, the formula on the page should be corrected:

FM3, cumulative typos

Page 24

Instead of: N ( N + 1) =
t =1

Should be: N ( N + 1) =

1
VB

t ( t + 1) Pt

( 1 + r) t

t ( t + 1) Pt

t =1

( 1+ r )

[2] Page 701, the lines below the top spreadsheet clip:
Instead of:
duration:

we have defined to calculate the second derivative of the

M

Should be: we have defined to calculate

t =1

t ( t + 1) Pt

( 1+ r )

[2] Page 720, the table of Long-term Senior Debt Ratings, column 2
Instead of: AA3
Should be: Aa3

[1] Page 750, 4th line from bottom:

Instead of: d4raw
Should be: draw
(the program on the disk is correct)

[2] Page 789, 5th bullet at the top of the page:

Instead of: VLoopkup
Should be: VLookup

[1] Page 886:

removed:

The apostrophe in front of the extension of line 9 should be

Instead of: (n-1)*n

Should be: (n-1)*n

FM3, cumulative typos

Page 25

[1] Page 889, second function box.

parallel the one previous:

The second commented expression should

Instead of:
Make the
function return
#Num!
Should be:
Make the function
return #Num!
[2] Page 890, exercise 6: The screenclip should be replaced by the following:
A

Exercise 6

1
2
3
4
5
6
7

Deposit
100
100
100
100
150

Years
1
2
12
12
5

FT0

FT1
110
110
2500
225
3400

125
100
5000
1387.5
2500

113.636
110.494
200.000
616.680
192.504

<-<-<-<-<--

=Bond(A3,B3,C3,D3)
=Bond(A4,B4,C4,D4)
=Bond(A5,B5,C5,D5)
=Bond(A6,B6,C6,D6)
=Bond(A7,B7,C7,D7)

There is also a mistake in the VBA of the answer on the disk. The 12 * Years
should have been enclosed in parentheses. This has been corrected on the disk.
Function Bond(Deposit, Years, FT0, FT1)
Temp1 = Deposit + Deposit * (FT1 - FT0) / FT0
Temp2 = Deposit * (1 + 0.05 / 12) ^ (12 * Years)
If Temp1 > Temp2 Then Bond = Temp1 Else Bond = Temp2
End Function
[2] Page 1089: The promised files didnt make it to the disk. Ive posted them
here (they will be added to the disk starting with the third printing).

fm3_chapter41_var_cov.doc

fm3_chapter41_var_cov.xls

FM3, cumulative typos

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