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Chapter12
Problem 1

For a large-company stock mutual fund, would you expect the betas to be positive or negative for

each of the factors in a Fama-French multifactor model?

Step-by-step solution

step 1 of 1

For a large-company stock fund, we would expect the beta for the market risk premium to be near one since large company returns account for a large part of the total market

return on a market-value basis. We would expect the betas for the SMB and HML risk factors to be low, and possibly negative, since large company stock returns are not highly

related to small company stock returns and large company stocks tend to be more oriented toward value stocks.

Problem 1ACQ

Systematic versus Unsystematic Risk Describe the difference between systematic risk and

unsystematic risk.

Step-by-step solution

step 1 of 1

Systematic risk is risk that cannot be diversified away through formation of a portfolio. Generally, systematic risk factors are those factors that affect a large number

of firms in the market, however, those factors will not necessarily affect all firms equally. Unsystematic risk is the type of risk that can be diversified away through

portfolio formation. Unsystematic risk factors are specific to the firm or industry. Surprises in these factors will affect t he returns of the firm in which you are interested,

but they will have no effect on the returns of firms in a different industry and perhaps little effect on other firms in the same industry.

Problem 1SQP

Factor Models A researcher has determined that a two-factor model is appropriate to determine

the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP
is expected to grow by 3.5 percent, and the interest rate is expected to be 2.9 percent. A stock

has a beta of 1.2 on the percentage change in GNP and a beta of ‒.8 on the interest rate. If the

expected rate of return on the stock is 11 percent, what is the revised expected return on the

stock if GNP actually grows by 3.2 percent and interest rates are 3.4 percent?

Step-by-step solution

step 1 of 1

Since we have the expected return of the stock, the revised expected return can be determined using the innovation, or surprise, in the risk factors. So, the revised expected

return is:

R = 11% + 1.2(3.2% – 3.5%) – 0.8(3.4% – 2.9%)

R = 10.24%

Problem 2

The Fama-French factors and risk-free rates are available at Ken French’s Web site:

www.dartmouth.edu/~kfrench. Download the monthly factors and save the most recent 60 months for

each factor. The historical prices for each of the mutual funds can be found on various Web sites,

including finance.yahoo.com. Find the prices of each mutual fund for the same time as the

Fama–French factors and calculate the returns for each month. Be sure to include dividends. For

each mutual fund, estimate the multi- factor regression equation using the Fama-French factors.

How well do the regression estimates explain the variation in the return of each mutual fund?

Step-by-step solution

step 1 of 1
The following shows the results of the regression estimates for the period between January 2001 and December 2005. The actual answer to the case will change based on current

market returns.

Fidelity Magellan:

Regression Statistics
Multiple R 0.96923
R Square 0.93941
Adjusted R Square 0.93617
Standard Error 0.01265
Observations 60

ANOVA
df SS MS F Significance F
Regression 3 0.139004 0.046335 289.4198 4.74E-34
Residual 56 0.008965 0.00016
Total 59 0.14797

Coefficients Standard Error t Stat P-value

Intercept -0.00148 0.001665 -0.88867 0.37798
Mkt-RF 1.230512 0.04505 27.31433 4.7E-34
SMB -0.13006 0.082425 -1.57795 0.120209
HML -0.35628 0.086944 -4.09784 0.000136

Fidelity Low-Priced Stock Fund:

Regression Statistics
Multiple R 0.97008
R Square 0.94106
Adjusted R Square 0.93790
Standard Error 0.01177
Observations 60

ANOVA
df SS MS F Significance F
Regression 3 0.123813 0.041271 298.0359 2.19E-34
Residual 56 0.007755 0.000138
Total 59 0.131568
 Coefficients Standard Error t Stat P-value
Intercept 0.00157 0.001548 1.01372 0.315076
Mkt-RF 1.047432 0.041898 24.99949 4.63E-32
SMB 0.322687 0.076658 4.209435 9.36E-05
HML 0.082383 0.080861 1.018823 0.312668

Baron Small Cap Fund:

Regression Statistics
Multiple R 0.93283
R Square 0.87017
Adjusted R Square 0.86321
Standard Error 0.01874
Observations 60

ANOVA
df SS MS F Significance F
Regression 3 0.131768 0.043923 125.108 8.46E-25
Residual 56 0.01966 0.000351
Total 59 0.151429

Coefficients Standard Error t Stat P-value

Intercept 0.002124 0.002465 0.861594 0.392585
Mkt-RF 1.045257 0.066713 15.66805 3.97E-22
SMB 0.465691 0.122059 3.815284 0.000342
HML -0.26523 0.128752 -2.06004 0.044053

Problem 2ACQ

APT Consider the following statement: For the APT to be useful, the number of systematic risk

factors must be small. Do you agree or disagree with this statement? Why?

Step-by-step solution

step 1 of 1

Any return can be explained with a large enough number of systematic risk factors. However, for a factor model to be useful as a practical matter, the number of factors

that explain the returns on an asset must be relatively limited.

Problem 2SQP

Factor Models Suppose a three-factor model is appropriate to describe the returns of a stock.

Information about those three factors is presented in the following chart:

Factor β Expected ValueActual Value

GDP .0000479$13,275 $13,601
Inflation ‒1.30 3.9% 3.2%
Interest rates‒.67 5.2% 4.7%

a.What is the systematic risk of the stock return?

b.Suppose unexpected bad news about the firm was announced that causes the stock price to drop

by 2.6 percent. If the expected return on the stock is 10.8 percent, what is the total return

on this stock?

Step-by-step solution

step 1 of 2

a.If m is the systematic risk portion of return, then:

m = βGNPΔGNP + βInflationΔInflation + βrΔInterest rates

m = .0000479($13,601 – 13,275) – 1.30(3.20% – 3.90%) – .67(4.70% – 5.20%)

m = 2.81%

step 2 of 2

b.The unsystematic return is the return that occurs because of a firm specific factor such as the bad news about the company. So, the unsystematic return of the stock

is –2.6 percent. The total return is the expected return, plus the two components of unexpected return: the systematic risk portion of return and the unsy stematic portion.

So, the total return of the stock is:

R = + m + ε
R = 10.80% + 2.81% – 2.6%

R = 11.01%

Problem 3

What do you observe about the beta coefficients for the different mutual funds? Comment on any

similarities or differences.

Step-by-step solution

step 1 of 1

This answer will depend on the returns used by the students.

Problem 3ACQ

APT David McClemore, the CFO of Ultra Bread, has decided to use an APT model to estimate the required

return on the company’s stock. The risk factors he plans to use are the risk premium on the stock

market, the inflation rate, and the price of wheat. Because wheat is one of the biggest costs

Ultra Bread faces, he feels this is a significant risk factor for Ultra Bread. How would you evaluate

his choice of risk factors? Are there other risk factors you might suggest?

Step-by-step solution

step 1 of 1

The market risk premium and inflation rates are probably good choices. The price of wheat, while a risk factor for Ultra Products, is not a market risk factor and will

not likely be priced as a risk factor common to all stocks. In this case, wheat would be a firm specific risk factor, not a market risk factor. A better model would employ

macroeconomic risk factors such as interest rates, GDP, energy prices, and industrial production, among others.

Problem 3SQP
Factor Models Suppose a factor model is appropriate to describe the returns on a stock. The current

expected return on the stock is 10.5 percent. Information about those factors is presented in

the following chart:

Factor β Expected ValueActual Value

Growth in GNP 2.04 1.80% 2.6%
Inflation ‒1.15 4.3 4.8

a.What is the systematic risk of the stock return?

b.The firm announced that its market share had unexpectedly increased from 23 percent to 27 percent.

Investors know from past experience that the stock return will increase by .45 percent for every

1 percent increase in its market share. What is the unsystematic risk of the stock?

c.What is the total return on this stock?

Step-by-step solution

step 1 of 3

a.If m is the systematic risk portion of return, then:

m = βGNPΔ%GNP + βrΔInterest rates

m = 2.04(2.6% – 1.8%) – 1.15(4.8% – 4.3%)

m = 1.06%

step 2 of 3

b.The unsystematic is the return that occurs because of a firm specific factor such as the increase in market share. If ε is the unsystematic risk portion of the return,

then:
ε = 0.45(27% – 23%)

ε = 1.80%

step 3 of 3

c.The total return is the expected return, plus the two components of unexpected return: the systematic risk portion of return and the unsystematic portion. So, the total

return of the stock is:

R = + m + ε

R = 10.50% + 1.06% + 1.80%

R = 13.36%

Problem 4

If the market is efficient, what value would you expect for alpha? Do your estimates support market

efficiency?

Step-by-step solution

step 1 of 1

If the market is efficient, all assets should have an alpha of zero. In this case, none of the three funds has a statisticall y significant positive alpha, so the evidence

provided here against market efficiency is limited.

Problem 4ACQ

Systematic and Usystematic Risk You own stock in the Lewis-Striden Drug Company. Suppose you had

expected the following events to occur last month:

a.The government would announce that real GNP had grown 1.2 percent during the previous quarter.

The returns of Lewis-Striden are positively related to real GNP.

b.The government would announce that inflation over the previous quarter was 3.7 percent. The

returns of Lewis-Striden are negatively related to inflation.

c.Interest rates would rise 2.5 percentage points. The returns of Lewis-Striden are negatively

related to interest rates.

d.The president of the firm would announce his retirement. The retirement would be effective six

months from the announcement day. The president is well liked: In general, he is considered an

asset to the firm.

e. Research data would conclusively prove the efficacy of an experimental drug. Completion of

the efficacy testing means the drug will be on the market soon.

Suppose the following events actually occurred:

a.The government announced that real GNP grew 2.3 percent during the previous quarter.

b.The government announced that inflation over the previous quarter was 3.7 percent.

c.Interest rates rose 2.1 percentage points.

d.The president of the firm died suddenly of a heart attack.

e.Research results in the efficacy testing were not as strong as expected. The drug must be tested

for another six months, and the efficacy results must be resubmit-ted to the FDA.

f.Lab researchers had a breakthrough with another drug.

g.A competitor announced that it will begin distribution and sale of a medicine that will compete

directly with one of Lewis-Striden’s top-selling products.

Discuss how each of the actual occurrences affects the return on your Lewis-Striden stock. Which

events represent systematic risk? Which events represent unsystematic risk?

Step-by-step solution

step 1 of 8

a.Real GNP was higher than anticipated. Since returns are positively related to the level of GNP, returns should rise based on this factor.

step 2 of 8

b.Inflation was exactly the amount anticipated. Since there was no surprise in this announcement, it will not affect Lewis-Striden returns.

step 3 of 8

c.Interest rates are lower than anticipated. Since returns are negatively related to interest rates, the lower than expected rate is good news. Returns should rise due

to interest rates.

step 4 of 8
 d.The President’s death is bad news. Although the president was expected to retire, his retirement would not be effective for six months. During that period he would

still contribute to the firm. His untimely death means that those contributions will not be made. Since he was generally considered an asset to the firm, his death will

cause returns to fall. However, since his departure was expected soon, the drop might not be very large.

step 5 of 8

e.The poor research results are also bad news. Since Lewis-Striden must continue to test the drug, it will not go into production as early as expected. The delay will

affect expected future earnings, and thus it will dampen returns now.

step 6 of 8

f.The research breakthrough is positive news for Lewis Striden. Since it was unexpected, it will cause returns to rise.

step 7 of 8

g.The competitor’s announcement is also unexpected, but it is not a welcome surprise. This announcement will lower the returns on Lewis-Striden.

step 8 of 8

The systematic factors in the list are real GNP, inflation, and interest rates. The unsystematic risk factors are the president’s ability to contribute to the firm, the

research results, and the competitor.

Problem 4SQP

Multifactor Models Suppose stock returns can be explained by the following three- factor model:

Ri. = RF+β1F1 + β2F2– β3F3

Assume there is no firm-specific risk. The information for each stock is presented here:

β1 β2 β3
Stock A1.45.80 .05
Stock B.73 1.25 –.20
Stock C.89 –.141.24

The risk premiums for the factors are 5.5 percent, 4.2 percent, and 4.9 percent, respectively.

If you create a portfolio with 20 percent invested in stock A, 20 percent invested in stock B,
and the remainder in stock C, what is the expression for the return on your portfolio? If the

risk-free rate is 5 percent, what is the expected return on your portfolio?

Step-by-step solution

step 1 of 1

The beta for a particular risk factor in a portfolio is the weighted average of the betas of the assets. This is true whether the betas are from a single factor model or

a multi-factor model. So, the betas of the portfolio are:

F1 = .20(1.45) + .20(0.73) + .60(0.89)

F1 = 0.97

F2 = .20(0.80) + .20(1.25) + .60(–0.14)

F2 = 0.33

F3 = .20(0.05) + .20(–0.20) + .60(1.24)

F3 = 0.71

So, the expression for the return of the portfolio is:

Ri = 5% + 0.97F1 + 0.33F2 – 0.71F3

Which means the return of the portfolio is:

Ri = 5% + 0.97(5.50%) + 0.33(4.20%) – 0.71(4.90%)

Ri = 8.21%

Intermediate

Problem 5

Which fund has performed best considering its risk? Why?

Step-by-step solution
step 1 of 1

Once adjusting for risk, we cannot say any of these three funds performed better since all three alphas are not significantly different from zero at any reasonable level

of confidence.

Problem 5ACQ

Market Model versus APT What are the differences between a k-factor model and the market model?

Step-by-step solution

step 1 of 1

The main difference is that the market model assumes that only one factor, usually a stock market aggregate, is enough to exp lain stock returns, while a k-factor model

relies on k factors to explain returns.

Problem 5SQP

Multifactor Models Suppose stock returns can be explained by a two-factor model. The firm-specific

risks for all stocks are independent. The following table shows the information for two diversified

portfolios:

β 1 β2 E(R)
Portfolio A .85 1.15 16%
Portfolio B1.45–.25 12

If the risk-free rate is 4 percent, what are the risk premiums for each factor in this model?

Step-by-step solution

step 1 of 1

We can express the multifactor model for each portfolio as:

E(R P ) = RF + β1F1 + β2F2

where F1 and F2 are the respective risk premiums for each factor. Expressing the return equation for each portfolio, we get:
16% = 4% + 0.85 F1 + 1.15F2

12% = 4% + 1.45 F1 – 0.25F2

We can solve the system of two equations with two unknowns. Multiplying each equation by the respective F2 factor for the other equation, we get:

4.00% = 1.0% + .2125 F1 + 0.2875F2

13.8% = 4.6% + 1.6675 F1 – 0.2875F2

Summing the equations and solving F1 for gives us:

17.8% = 5.6% + 1.88 F1

F1 = 6.49%

And now, using the equation for portfolio A, we can solve for F2, which is:

16% = 4% + 0.85(6.490%) + 1.15 F2

F2 = 5.64%

Problem 6ACQ

APT In contrast to the CAPM, the APT does not indicate which factors are expected to determine

the risk premium of an asset. How can we determine which factors should be included? For example,

one risk factor suggested is the company size. Why might this be an important risk factor in an

APT model?

Step-by-step solution

step 1 of 1

The fact that APT does not give any guidance about the factors that influence stock returns is a commonly-cited criticism. However, in choosing factors, we should choose

factors that have an economically valid reason for potentially affecting stock returns. For example, a smaller company has more risk than a large company. Therefore, the

size of a company can affect the returns of the company stock.

Problem 6SQP

Market Model The following three stocks are available in the market:

E(R) β
Stock A10.5%1.20
Stock B 13.0 .98
Stock C 15.7 1.37
Market 14.2 1.00

Assume the market model is valid.

a.Write the market model equation for each stock.

b.What is the return on a portfolio with weights of 30 percent stock A, 45 percent stock B, and

25 percent stock C ?

c.Suppose the return on the market is 15 percent and there are no unsystematic surprises in the

returns. What is the return on each stock? What is the return on the portfolio? .

Step-by-step solution

step 1 of 3

a.The market model is specified by:

R = + β(RM – ) + ε

so applying that to each Stock:

Stock A:
R A = + βA(RM – ) + εA

R A = 10.5% + 1.2(RM – 14.2%) + εA

Stock B:

R B = + βB(RM – ) + εB

R B = 13.0% + 0.98(RM – 14.2%) + εB

Stock C:

R C = + βC(RM – ) + εC

R C = 15.7% + 1.37(RM – 14.2%) + εC

step 2 of 3

b.Since we don't have the actual market return or unsystematic risk, we will get a formula with those values as unknowns:

R P = .30RA + .45RB + .25RC

R P = .30[10.5% + 1.2(RM – 14.2%) + εA] + .45[13.0% + 0.98(RM – 14.2%) + εB]

+ .25[15.7% + 1.37(R M – 14.2%) + εC]

R P = .30(10.5%) + .45(13%) + .25(15.7%) + [.30(1.2) + .45(.98) + .25(1.37)](RM – 14.2%)

+ .30ε A + .45εB + .25εC

R P = 12.925% + 1.1435(RM – 14.2%) + .30εA + .45εB + .25εC

step 3 of 3

c.Using the market model, if the return on the market is 15 percent and the systematic risk is zero, the return for each individual stock is:

R A = 10.5% + 1.20(15% – 14.2%)

R A = 11.46%

R B = 13% + 0.98(15% – 14.2%)

R B = 13.78%
R C = 15.70% + 1.37(15% – 14.2%)

R C = 16.80%

To calculate the return on the portfolio, we can use the equation from part b, so:

R P = 12.925% + 1.1435(15% – 14.2%)

R P = 13.84%

Alternatively, to find the portfolio return, we can use the return of each asset and its portfolio weight, or:

R P = X1R1 + X2R2 + X3R3

R P = .30(11.46%) + .45(13.78%) + .25(16.80%)

R P = 13.84%

Problem 7ACQ

CAPM versus APT What is the relationship between the one-factor model and the CAPM?

Step-by-step solution

step 1 of 1

Assuming the market portfolio is properly scaled, it can be shown that the one-factor model is identical to the CAPM.

Problem 7SQP

Portfolio Risk You are forming an equally weighted portfolio of stocks. Many stocks have the same

beta of .84 for factor 1 and the same beta of 1.69 for factor 2. All stocks also have the same

expected return of 11 percent. Assume a two-factor model describes the return on each of these

stocks.

a.Write the equation of the returns on your portfolio if you place only five stocks in it.
b.Write the equation of the returns on your portfolio if you place in it a very large number of

stocks that all have the same expected returns and the same betas.

Step-by-step solution

step 1 of 2

a.Since five stocks have the same expected returns and the same betas, the portfolio also has the same expected return and beta. However, the unsystematic risks might

be different, so the expected return of the portfolio is:

= 11% + 0.84F1 + 1.69F2 + (1/5)(ε1 + ε2 + ε3 + ε4 + ε5)

step 2 of 2

b.Consider the expected return equation of a portfolio of five assets we calculated in part a. Since we now have a very large number of stocks in the portfolio, as:

N → ∞, → 0

But, the ε js are infinite, so:

(1/N)(ε 1 + ε2 + ε3 + ε4 +…..+ εN) → 0

Thus:

= 11% + 0.84F1 + 1.69F2

Challenge

Problem 8ACQ

Factor Models How can the return on a portfolio be expressed in terms of a factor model?

Step-by-step solution

step 1 of 1
It is the weighted average of expected returns plus the weighted average of each security's beta times a factor F plus the weighted average of the unsystematic risks of

the individual securities.

Problem 8SQP

APT There are two stock markets, each driven by the same common force, F, with an expected value

of zero and standard deviation of 10 percent. There are many securities in each market; thus,

you can invest in as many stocks as you wish. Due to restrictions, however, you can invest in

only one of the two markets. The expected return on every security in both markets is 10 percent.

The returns for each security, i, in the first market are generated by the relationship:

R1i= .10 + 1.5F + ϵ1i,.

where e1 is the term that measures the surprises in the returns of stock i in market l. These

surprises are normally distributed; their mean is zero. The returns on security j in the second

market are generated by the relationship:

R2j = .10 + .5F + ϵ2j

where ϵ2j is the term that measures the surprises in the returns of stock j in market 2. These

surprises are normally distributed; their mean is zero. The standard deviation ϵ1i,.of and ϵ2j

for any two stocks, i and j, is 20 percent.

a.If the correlation between the surprises in the returns of any two stocks in the first market

is zero, and if the correlation between the surprises in the returns of any two stocks in the

second market is zero, in which market would a risk-averse person prefer to invest? (Note: The
correlation between ϵ1j and ϵ2j. for any i and j is zero, and the correlation between ϵ2j. and

ϵ2j j for any i and j is zero.)

b.If the correlation between ϵ1j and ϵ1j. in the first market is .9 and the correlation between

ϵ2j and ϵ2j in the second market is zero, in which market would a risk-averse person prefer to

invest?

c.If the correlation between ϵ1j and ϵ1j in the first market is zero and the correlation between

ϵ2j and ϵ2j in the second market is.5,in which market would a risk-averse person prefer to invest?

d.In general, what is the relationship between the correlations of the disturbances in the two

markets that would make a risk-averse person equally willing to invest in either of the two markets?

Step-by-step solution

step 1 of 4

To determine which investment an investor would prefer, you must compute the variance of portfolios created by many stocks from either market. Because you know that

diversification is good, it is reasonable to assume that once an investor has chosen the market in which she will invest, she will buy many stocks in that market.

Known:

E F = 0 and σ = 0.10

E ε = 0 and Sεi = 0.20 for all i

If we assume the stocks in the portfolio are equally-weighted, the weight of each stock is , that is:
X i = for all i

If a portfolio is composed of N stocks each forming 1/N proportion of the portfolio, the return on the portfolio is 1/N times the sum of the returns on the N stocks. To

find the variance of the respective portfolios in the 2 markets, we need to use the definition of variance from Statistics:

Var(x) = E[x – E(x)] 2

In our case:

Var(R P) = E[RP – E(RP)]2

Note however, to use this, first we must find R P and E(RP). So, using the assumption about equal weights and then substituting in the known equation for Ri:

R P =

R P = (0.10 + βF + εi)

R P = 0.10 + βF +

Also, recall from Statistics a property of expected value, that is:

If:

where a is a constant, and , , and are random variables, then:

and
E( a) = a

Now use the above to find E(R P):

E(R P) = E

E(R P) = 0.10 + βE(F) +

E(R P) = 0.10 + β(0) +

E(R P) = 0.10

Next, substitute both of these results into the original equation for variance:

Var(R P) = E[RP – E(RP)]2

Var(R P) = E

Var(R P) = E

Var(R P) = E

Var(R P) =

Finally, since we can have as many stocks in each market as we want, in the limit, as N → ∞,

→ 0, so we get:

Var(R P) = β2σ2 + Cov(εi,εj )

and, since:
Cov(ε i,εj) = σiσjρ(εi,εj)

and the problem states that σ 1 = σ2 = 0.10, so:

Var(R P) = β2σ2 + σ1σ2ρ(εi,εj)

Var(R P) = β2(0.01) + 0.04ρ(εi,εj)

So now, summarize what we have so far:

R 1i = 0.10 + 1.5F + ε1i

R 2i = 0.10 + 0.5F + ε2i

E(R 1P) = E(R2P) = 0.10

Var(R 1P) = 0.0225 + 0.04ρ(ε1i,ε1j)

Var(R 2P) = 0.0025 + 0.04ρ(ε2i,ε2j)

Finally we can begin answering the questions a, b, &c for various values of the correlations:

a.Substitute ρ(ε 1i,ε1j) = ρ(ε2i,ε2j) = 0 into the respective variance formulas:

Var(R 1P) = 0.0225

Var(R 2P) = 0.0025

Since Var(R 1P) > Var(R2P), and expected returns are equal, a risk averse investor will prefer to invest in the second market.

step 2 of 4

b.If we assume ρ(ε 1i,ε1j) = 0.9, and ρ(ε2i,ε2j) = 0, the variance of each portfolio is:

Var(R 1P) = 0.0225 + 0.04ρ(ε1i,ε1j)

Var(R 1P) = 0.0225 + 0.04(0.9)

Var(R 1P) = 0.0585

Var(R 2P) = 0.0025 + 0.04ρ(ε2i,ε2j)

Var(R 2P) = 0.0025 + 0.04(0)

Var(R 2P) = 0.0025

Since Var(R 1P) > Var(R2P), and expected returns are equal, a risk averse investor will prefer to invest in the second market.

step 3 of 4

c.If we assume ρ(ε 1i,ε1j) = 0, and ρ(ε2i,ε2j) = .5, the variance of each portfolio is:

Var(R 1P) = 0.0225 + 0.04ρ(ε1i,ε1j)

Var(R 1P) = 0.0225 + 0.04(0)

Var(R 1P) = 0.0225

Var(R 2P) = 0.0025 + 0.04ρ(ε2i,ε2j)

Var(R 2P) = 0.0025 + 0.04(0.5)

Var( R2P) = 0.0225

Since Var(R 1P) = Var(R2P), and expected returns are equal, a risk averse investor will be indifferent between the two markets.

step 4 of 4

d.Since the expected returns are equal, indifference implies that the variances of the portfolios in the two markets are also equal. So, set the variance equations e qual,

and solve for the correlation of one market in terms of the other:

Var(R 1P) = Var(R2P)

0.0225 + 0.04ρ(ε 1i,ε1j) = 0.0025 + 0.04ρ(ε2i,ε2j)

ρ(ε 2i,ε2j) = ρ(ε1i,ε1j) + 0.5

Therefore, for any set of correlations that have this relationship (as found in part c), a risk adverse investor will be indifferent between the two markets

Problem 9ACQ

Data Mining What is data mining? Why might it overstate the relation between some stock attribute

and returns?

Step-by-step solution
step 1 of 1

Choosing variables because they have been shown to be related to returns is data mining. The relation found between some attribute and returns can be accidental, thus overstated.

For example, the occurrence of sunburns and ice cream consumption are related; however, sunburns do not necessarily cause ice cream consumption, or vice versa. For a factor

to truly be related to asset returns, there should be sound economic reasoning for the relationship, not just a statistical one.

Problem 9SQP

APT Assume that the following market model adequately describes the return- generating behavior

of risky assets:

Rit = αi. + βi RMt, + ϵit

Here:

R it = The return on the ith asset at time t.

RMt = The return on a portfolio containing all risky assets in some proportion at time t.

RMt and ϵitare statistically independent.

Short selling (i.e., negative positions) is allowed in the market. You are given the following

information:

AssetβiE(Ri)Var(ϵi)
A .7 8.41% .0100
B 1.212.06 .0144
C 1.513.95 .0225

The variance of the market is .0121, and there are no transaction costs.

a.Calculate the standard deviation of returns for each asset.

b.Calculate the variance of return of three portfolios containing an infinite number of asset

types A, B, or C, respectively.

c.Assume the risk-free rate is 3.3 percent and the expected return on the market is 10.6 percent.

Which asset will not be held by rational investors?

d.What equilibrium state will emerge such that no arbitrage opportunities exist? Why?

Step-by-step solution

step 1 of 4

a.In order to find standard deviation, σ, you must first find the Variance, since σ = . Recall from Statistics a property of Variance:

If:

where a is a constant, and , , and are random variables, then:

and:

Var( a) = 0

The problem states that return-generation can be described by:

R i,t = αi + βi(RM) + εi,t

Realize that R i,t, RM, and εi,t are random variables, and αi and βi are constants. Then, applying the above properties to this model, we get:

Var(R i) = Var(RM) + Var(εi)

and now we can find the standard deviation for each asset:

= 0.72(0.0121) + 0.01 = 0.015929

= = .1262 or 12.62%

= 1.22(0.0121) + 0.0144 = 0.031824

= = .1784 or 17.84%

= 1.52(0.0121) + 0.0225 = 0.049725

= = .2230 or 22.30%

step 2 of 4

b. From the above formula for variance, note that as N → ∞, → 0, so you get:

Var(R i) = Var(RM )

So, the variances for the assets are:

= 0.72(.0121) = 0.005929

= 1.22(.0121) = 0.017424

= 1.52(.0121) = 0.027225

step 3 of 4

c.We can use the model:

= RF + βi( – RF)
which is the CAPM (or APT Model when there is one factor and that factor is the Market). So, the expected return of each asset is:

= 3.3% + 0.7(10.6% – 3.3%) = 8.41%

= 3.3% + 1.2(10.6% – 3.3%) = 12.06%

= 3.3% + 1.5(10.6% – 3.3%) = 14.25%

We can compare these results for expected asset returns as per CAPM or APT with the expected returns given in the table. This shows that assets A&B are accurately priced,

but asset C is overpriced (the model shows the return should be higher). Thus, rational investors will not hold asset C.

step 4 of 4

d. If short selling is allowed, rational investors will sell short asset C, causing the price of asset C to decrease until no arbitrage opportunity exists. In other w ords,

the price of asset C should decrease until the return becomes 14.25 percent.

Problem 10ACQ

Factor Selection What is wrong with measuring the performance of a U.S. growth stock manager

against a benchmark composed of British stocks?

Step-by-step solution

step 1 of 1

Using a benchmark composed of English stocks is wrong because the stocks included are not of the same style as those in a U.S. growth stock fund.

Problem 10SQP

APT Assume that the returns on individual securities are generated by the following two-factor

model:

Rit = E(Rit) +βijF1t+βi2F2t

Here:

Rit is the return on security i at time t.

F1t and F2t are market factors with zero expectation and zero covariance. In addition, assume

that there is a capital market for four securities, and the capital market for these four assets

is perfect in the sense that there are no transaction costs and short sales (i.e., negative

positions) are permitted. The characteristics of the four securities follow:

Securityβ 1β2E(R)
1 1.01.5 20%
2 .52.0 20
3 1.0 .5 10
4 1.5.75 10

a.Construct a portfolio containing (long or short) securities 1 and 2, with a return that does

not depend on the market factor, F1t, in any way. (Hint: Such a portfolio will have β1 = 0.)

Compute the expected return and β 2 coefficient for this portfolio.

b.Following the procedure in (a), construct a portfolio containing securities 3 and 4 with a return

that does not depend on the market factor, F1t. Compute the expected return and β2 coefficient

for this portfolio.

c.There is a risk-free asset with an expected return equal to 5 percent, β1 = 0, and β2 = 0.

Describe a possible arbitrage opportunity in such detail that an investor could implement it.
d.What effect would the existence of these kinds of arbitrage opportunities have on the capital

markets for these securities in the short run and long run? Graph your analysis.

Step-by-step solution

step 1 of 4

a.Let:

X 1 = the proportion of Security 1 in the portfolio and

X 2 = the proportion of Security 2 in the portfolio

and note that since the weights must sum to 1.0,

X 1 = 1 – X2

Recall from Chapter 10 that the beta for a portfolio (or in this case the beta for a factor) is the weighted average of the security betas, so

β P1 = X1β11 + X2β21

β P1 = X1β11 + (1 – X1)β21

Now, apply the condition given in the hint that the return of the portfolio does not depend on F1. This means that the portfolio beta for that factor will be 0, so:

β P1 = 0 = X1β11 + (1 – X1)β21

β P1 = 0 = X1(1.0) + (1 – X1)(0.5)

and solving for X 1 and X2:

X 1 = – 1

X 2 = 2

Thus, sell short Security 1 and buy Security 2.

To find the expected return on that portfolio, use

R P = X1R1 + X2R2

so applying the above:

E(R P) = –1(20%) + 2(20%)

E(R P) = 20%

β P1 = –1(1) + 2(0.5)

β P1 = 0

step 2 of 4

b.Following the same logic as in part a, we have

β P2 = 0 = X3β31 + (1 – X3)β41

β P2 = 0 = X3(1) + (1 – X3)(1.5)

and

X 3 = 3

X 4 = –2

Thus, sell short Security 4 and buy Security 3. Then,

E(R P2) = 3(10%) + (–2)(10%)

E(R P2) = 10%

β P2 = 3(0.5) – 2(0.75)

β P2 = 0

Note that since both β P1 and βP2 are 0, this is a risk free portfolio!

step 3 of 4

c.The portfolio in part b provides a risk free return of 10%, which is higher than the 5% return provided by the risk free security. To take advantage of this opportunity,

borrow at the risk free rate of 5% and invest the funds in a portfolio built by selling short security four and buying security three with weights (3,–2) as in part b.

step 4 of 4

d.First assume that the risk free security will not change. The price of security four (that everyone is trying to sell short) will decrease, and the price of security

three (that everyone is trying to buy) will increase. Hence the return of security four will increase and the return of security three will decrease.

The alternative is that the prices of securities three and four will remain the same, and the price of the risk-free security drops until its return is 10%.

Finally, a combined movement of all security prices is also possible. The prices of security four and the risk-free security will decrease and the price of security three

will increase until the opportunity disappears.

Another random document with
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Sacchini, and Cimarosa, and it is not improbable that operas by
these composers were also given, though we find no mention of the
fact. The first unquestionable record of a French or Italian opera in
this country is the performance of Pergolesi's Serva Padrona, under
the title of 'The Mistress and Maid,' given by a French company at
Baltimore in 1790. In 1791-92 Dibdin's 'The Deserter,' adapted from
Le Déserteur of Monsigny, was given in New York, and it may be of
interest to note that Sheridan and Linley's 'Duenna' was given in the
same season. Charleston, always an enterprising city musically,
harbored a company of French comedians who arrived from St.
Domingo in 1794, and enjoyed performances of operas by
Rousseau, Grétry, Cimarosa, Paesiello, and other composers then
popular in Europe.

In the meantime there existed a healthy rivalry between New York

and Philadelphia touching the excellence of their respective operatic
organizations. Wignell and Reinagle opened the New Theatre in
Philadelphia in 1793 and gave especial prominence to opera. As
might be expected when Reinagle was at the helm, the
performances reached a high standard of artistic merit. Reinagle
himself was one of the conductors and among them also was Filippo
Trajetto, whom we have already met in the concert life of Boston.
Mrs. Oldmixon, Miss Broadhurst and Miss Brett seem to have been
the vocal stars. In New York James Hewitt, George Geilfert or Gilfert,
and Francis Hodgkinson directed the musical activities of the theatre
and exerted themselves strenuously to surpass Reinagle's
organization. Dunlap writes in his 'History of the American Theatre':
'We have noticed the improvement made by Mr. Hodgkinson in the
orchestra at New York, improvements rendered necessary by the
excellence of this branch of theatrical arrangement in the rival
company of Philadelphia. (The orchestra at Philadelphia, under the
direction of Reinagle, who sat at the harpsichord, was much superior
to that of New York.) Instead of the "one Mr. Pelham" and his
harpsichord, or the single fiddle of Mr. Hewlett, performers of great
skill filled the bands of the two rival cities. In New York the musicians
were principally French; most of these gentlemen who had seen
better days,—some driven from Paris by the revolution, some of
them nobles, some officers in the army of the king, others who had
sought refuge from the devastation of St. Domingo.' Certainly, the
debt of the United States to France is heavy in many directions.

Dr. Ritter has been at pains to compile a list of the English operas
given in New York between 1793 and 1823. The former year saw
Shield's 'The Farmer,' Storace's comic opera, 'No Song, No Supper,'
and Dibdin's 'The Waterman.' During the season 1793-94 there were
played Dibdin's 'Lionel and Clarissa,' and 'The Wedding Ring,'
Arnold's 'Inkle and Yarico,' Shield's 'Poor Soldier,' 'Love in a Camp,'
and 'Rosina,' 'The Beggar's Opera,' 'No Song, No Supper,' and 'The
Devil to Pay.' Dibdin's 'Quaker,' Arnold's 'The Children of the Wood,'
Storace's 'The Haunted Tower.' Carter's 'The Rival Candidate' and
'Macbeth' with music were given in 1794-95. In 1796 were produced
'Rosina,' 'The Children in the Wood,' 'The Maid of the Mill,' Reeve's
'The Purse,' Shield's 'Robin Hood,' 'No Song, No Supper,' 'The
Haunted Tower,' 'The Surrender of Calais,' Arnold's 'The
Mountaineer,' Altwood's 'The Prisoner,' 'Poor Soldier,' 'The Padlock,'
and an English version of Rousseau's 'Pygmalion.' What is probably
the first American opera was produced in New York on April 18 of the
same year. It is called 'The Archers, or the Mountaineers of
Switzerland,' and was written by Benjamin Carr to a libretto by
William Dunlap. In 1796 also appeared 'Edwin and Angelina,'
composed by Victor Pelissier to a libretto by one Smith. This has
often been spoken of as the first American opera, but apparently it
saw the light some months later than Carr's work, and, in any case,
Pelissier was not an American. Another opera from his pen, to a
libretto by William Dunlap, called 'The Vintage,' was produced in
New York in 1799—but we are anticipating.

The seasons of 1797 and 1798 seem to have been rather poor in
New York. Dr. Ritter notes only Storace's 'Siege of Belgrade' and
Shield's 'Fontainebleau' in the former year, and Mrs. Oldmixon in
'Inkle and Yarico' in the latter year. Nothing is mentioned for 1799
and 1800 except Pelissier's 'The Vintage' and an opera composed
by Hewitt to a libretto by Dunlap. In 1801 appeared Kelly's
'Bluebeard,' Reeve and Mazzinghi's 'Paul and Virginia,' 'The
Duenna,' Shield's 'Sprig of Laurel,' and Kelly's 'The Hunter of the
Alps.' Then there is a hiatus until 1807 and 1808, when we find 'The
Siege of Belgrade,' Dr. Arnold's 'The Review,' Kelly's 'We Fly by
Night' and 'Cinderella,' 'Forty Thieves,' Storace's 'Lodoiska,' and
Mazzinghi's 'The Exile.' Another famine followed until 1812 when
'Bluebeard' was produced. The years 1813-14 saw Henry Bishop's
'Athis,' 'The Farmer and His Wife,' and 'The Miller and His Men.'
Between 1814 and 1819 are noted 'The Poor Soldier,' 'Love in a
Village,' 'Review,' 'Siege of Belgrade,' 'Bluebeard,' 'Lodoiska,' 'The
Maid of the Mill,' 'Castle of Andalusia,' 'The Beggar's Opera,' 'Lionel
and Clarissa,' 'Fontainebleau,' Kelly's 'Bride of Abydos,' and 'Rob
Roy.' From this time on the vogue of English opera rapidly declined
and there are signs of a growing interest in Italian, French, and
German opera, though New York had little opportunity of hearing
such before 1825. An opera called 'The Barber of Seville,' adapted
by Bishop probably from Rossini's work, was produced in 1819-20.
Such adaptations seem to have been not infrequent, and it can
hardly be said that there was any artistic excuse for them. A similar
adaptation of Mozart's Nozze di Figaro, made by Bishop, was played
in New York in 1823 and two years later there was presented a
mutilated version of Weber's Freischütz. It is worthy of note that John
Howard Paine's 'Clari, the Maid of Milan,' containing the song 'Home,
Sweet Home,' was produced in New York on November 12, 1823.
The opera itself soon melted into oblivion, but the song has survived
as one of the most widely popular lyrics ever composed. Other
operas given in New York between 1819 and 1825 include Braham's
'English Fleet,' 'The Deserter,' Bishop's 'Henry IV,' Kelly's 'Russian,'
Bishop's 'Montrose,' 'The Duenna,' and Bishop's 'Maid Marian.'

III
One turns with relief to contemporary opera in New Orleans. The
preëminence of New Orleans as an operatic centre among American
cities of the late eighteenth and early nineteenth centuries was as
marked as that of New York has been in recent times, though its
population was only a fraction of that possessed by New York,
Philadelphia, or Boston. Of course, New Orleans really was not an
American city and did not contain any considerable number of
American residents until many years after the Louisiana Purchase. It
was, in effect, a French provincial city with a metropolitan flavor due
to its position as the head of a rich and important colony. When one
remembers the notably gregarious instincts of Frenchmen and their
intense and tenacious devotion to the homeland, it is easy to
understand how in New Orleans they reproduced as far as possible
the social and artistic conditions of Paris. The thoroughly French
character of New Orleans and its life remained unchanged during the
Spanish régime, and even the purchase effected no appreciable
change until many years had passed. This was especially so at the
opera, which even now remains a thoroughly French institution, and
it has been said that until after the Civil War American visitors to the
opera were very rare. Indeed, opera is a form of art which has
always appealed less to native Americans than to foreign-born
citizens.

Information on the actual beginnings of opera in New Orleans are

rather scanty, but we know that a regular troupe of French
comedians and singers appeared there in 1791, and it is to be
assumed that they presented operas of Grétry, Gluck, Dalayrac,
Monsigny, and others, more or less efficiently. Opera, drama, and
ballet in the best French manner were given at M. Croquet's Théâtre
St. Philippe in 1808. Another theatre was built in St. Peter Street in
1810, and among the operas given there in that and the following
year were Paesiello's 'Barber of Seville' and Zingarelli's 'Romeo and
Juliet.' The arrival of John Davis in 1811 with a troupe from San
Domingo marks one of the real epochs in American operatic
activities. Davis built the Théâtre d'Orléans in 1813 and, when it was
burned down four years later, he rebuilt it at a cost of $180,000. This
new theatre was by far the finest and best appointed in America.
Opera was given there three times a week by a regular opera
company, and not by artists who combined opera with the spoken
drama, as was customary elsewhere in America. After the death of
John Davis his son Pierre conducted the theatre for twenty-five
years. The glories of French opera in New Orleans during those
years must await mention in a later chapter, but, remarkable as they
were, they hardly surpassed the achievements of the elder Davis
during a period when opera elsewhere in America offered little of
interest or artistic importance. The works of Rossini, Mozart,
Spontini, Méhul, Grétry, Gluck, and other of the most eminent
operatic composers were given in the best manner by competent
orchestras and ensembles, by distinguished conductors and soloists.
Beginning with García's visit in 1825, New York received frequent
attentions from foreign opera companies, and soon was enjoying an
operatic life which has now grown to proportions surpassed by few
cities in the world, but at least half of the nineteenth century had
passed away before New Orleans lost its proud position as the real
home of opera in America.

W. D. D.
 FOOTNOTES:
[37] One must except Mr. Sonneck, who has unearthed some interesting material
on opera in America prior to 1750. The reader is referred to his article in 'The New
Music Review,' New York, Vol. 6, 1907.
 CHAPTER VI
OPERA IN THE UNITED STATES. PART I: NEW
YORK

The New York opera as a factor of musical culture—Manuel

García and his troupe; da Ponte's dream—The vicissitudes of the
Italian Opera House; Palmo's attempt at democratic opera—The
beginnings of 'social' opera: the Academy of Music—German
opera; Maretzek to Strakosch—The early years of the
Metropolitan—The Grau régime—Conried; Hammerstein; Gatti-
Casazza; Opera in English; the Century Opera Company.

The vogue of English ballad opera, as we have seen, began to lose

some of its hold on New York audiences during the first years of the
nineteenth century. Symptomatic of an awakening desire for other
forms of operatic entertainment were the adaptations of Il Barbiere di
Siviglia, Le Nozze di Figaro, Der Freischütz, and similar favorites of
the contemporary European stage. There existed in New York at that
time a society of some brilliance, wealth, and culture—a modest
replica of the upper circles of London, Paris, and Vienna. In these
latter cities the opera flourished as a social function; it was one of the
most important foci of fashion. Obviously New York could not remain
long without such an addition to its fashionable life. Nor could
English opera serve the purpose, for English opera had ceased to be
the thing in London. Society had taken up Italian opera, and only
Italian opera was then de rigueur. Why New York did not have Italian
opera at an earlier date it is difficult to say. Possibly the field did not
seem sufficiently tempting to the European entrepreneurs; possibly
New York society had not yet affected that cosmopolitan air which
had come to be the distinguishing mark of the socially elect
elsewhere.

Whatever factors operated to keep Italian opera out of New York, the
situation had altered sufficiently in 1825 to tempt Manuel García[38]
over with an opera company in that year. To be sure, García was
past his prime as a singer and, except for his daughter, Maria, and
the basso Angrisani, his company was worse than indifferent. But his
coming marked the beginning of an epoch in the operatic history of
this country. He gave New Yorkers a first taste of the best in
contemporary opera and inaugurated a fashion which on the whole
has been productive of very brilliant results. In spite of the fact that
opera is not and never has been in New York a diversion for the
proletariat; in spite of the fact that it has been to a large extent a
vehicle for ostentation; in spite of the fact that its conduct has not
always been guided by broad artistic ideals—in spite of all these and
other drawbacks New York has set for itself a standard of operatic
achievement which is scarcely surpassed by any city in the world.
The value of this standard in the promotion of musical culture is
questionable; that it subserves the best interests of art is not certain.
But at least New York must be awarded the credit of doing such
operatic work as it has chosen to do in a finished and magnificent
manner.

I
The foundation of this work was laid by Manuel García at the Park
Theatre in 1825. This house was opened in 1798 and was rebuilt in
1820 after its destruction by fire. It was the house of English opera
as well as of the spoken drama prior to the García invasion.
Apparently the pièce de résistance on García's contemplated
program was an authentic version of Rossini's Barbiere di Siviglia,
and it does not seem that he had in project anything more exacting
than this and other light examples of the reigning Italian school. But
in New York he ran foul of the old idealist, Lorenzo da Ponte,
librettist of Mozart's Don Giovanni, Le nozze di Figaro, and Così fan
tutte, now condemned to the obscure fate of a small merchant and
teacher of Italian.[39] Da Ponte persuaded García to put on Don
Giovanni and succeeded in obtaining the necessary reinforcements
to make such a production possible. The production of Don Giovanni
was really an event, but whether the people of New York accepted it
as such we cannot say. García also presented Rossini's Barbiere di
Siviglia, Tancredi, Il Turco in Italia, Sémiramide, and La Cenerentola,
besides two operas of his own composition entitled L'Amante astuto
and La Figlia dell'Aria. The beauty, art, and magnetism of the
youthful Maria García made the season a success and started the
fashion of operatic idols which still influences to a large extent the
success or failure of that form of art. Otherwise the season was
undistinguished.

García went to Mexico in 1826, but his daughter remained in New

York and sang in English opera at the recently erected New York
Theatre. She also sang in the choir of Grace Church—a strikingly
unusual proceeding for an artist who had already won international
renown. For over five years there was no more Italian opera in New
York, nor was there, indeed, a regular operatic season of any kind.
English ballad opera, however, again came into favor for a time and
there were also performances in English of such works as Auber's
Masaniello, Boieldieu's La dame blanche, and Mozart's Il flauto
magico—all wretched adaptations of the originals. Seemingly the
operatic managers of that time had all the peculiar vices of the
musical comedy producer of to-day. The scores of Mozart, Auber,
Rossini and other masters were subjected to incredible mutilations,
and inapt interpolations of every kind were used to catch the popular
taste. If the following picture of musical life in New York is not
overdrawn it certainly paints an extraordinary state of affairs. It is
taken from a letter written by a visiting German musician to the
Cæcilia, a musical journal of Mayence.[40]

'Here the musical situation is the following: New York has four
theatres—Park Theatre, Bowery Theatre, Lafayette Theatre, and
Chatham Theatre. Dramas, comedies, and spectacle pieces, also
the Wolf's Glen scene from Der Freyschütz, but without singing, as
melodrama, and small operettas are given. The performance of a
whole opera is not to be thought of. However, they have no sufficient
orchestra to do it. The orchestras are very bad indeed, as bad as it is
possible to imagine, and incomplete. Sometimes they have two
clarinets, which is a great deal; sometimes there is only one first
instrument. Of bassoons, oboes, trumpets, and kettle drums, one
never sees a sight. However, once in a while a first bassoon is
employed. Oboes are totally unknown in this country. Only one
oboist exists in North America and he is said to live in Baltimore.

'In spite of this incompleteness they play symphonies, and grand

overtures, and if a gap occurs they think this is only of passing
importance, provided it rattles away again afterward....

'Performances take place six times a week in these theatres. Sunday

is a day of rest. The performances commence at half past seven,
and last until twelve, sometimes till one. Rope-dancers, or one who
is a good clown—even if he be able to execute only tolerably well a
few jumps that resemble a dance, and can make many grotesque
grimaces,—or one who plays (all by himself) on the barrel-organ,
cymbals, big drum, Turkish pavilion,—these are the men that help
the manager to fill the treasury, and these people earn enormous
sums.'

At this ebb-tide of music in New York there stood out in bold relief the
venerable figure of Lorenzo da Ponte, the old idealist, the type of the
world's dreamers, whose achievements are rarely recorded.

'World-losers and world-forsakers

On whom the pale moon gleams
Yet we are the movers and shakers
Of the world for ever, it seems.'
Da Ponte had a dream. It was of a permanent Italian opera in New
York, with himself as poet. The dream was not realized, but it had an
important influence. After five years of endeavor da Ponte
succeeded in inducing a French tenor named Montressor to
undertake a season of opera at the Richmond Hill Theatre. The
season opened in October 6, 1832, but failed after thirty-five
performances. On the whole, it would seem that the company was a
very good one, and it is hard to explain its failure except on the
ground that New York audiences were still lacking in the faculty of
appreciation. The orchestra was supposed to be the best that had
yet been heard in the city, and, fortunately for New York, most of its
members settled there after the failure of the enterprise. The operas
performed during Montressor's season were Rossini's Cenerentola
and L'Italiani in Algieri, Bellini's Il Pirata, and Mercadante's Elisa e
Claudio.

Notwithstanding Montressor's failure, da Ponte still remained

undaunted. He now determined that the thing really needed was an
Italian opera house decked out with the same social halo as adorned
the brilliant institutions of London and Vienna. He was right. The
Metropolitan Opera House of to-day is just the sort of institution that
da Ponte forecasted, and its success proves that the old dreamer
was no bad prophet. Through his influence the Italian Opera House
was built on the corner of Church and Leonard Streets at a cost of
$150,000, and with the coöperation of many of the most eminent
citizens. Evidently it was designed to appeal to the cream of the
beau monde. We quote from the diary of Philip Hone, Esq.,
sometime mayor of New York:

'——The house is superb, and the decorations of the proprietors'

boxes (which occupy the whole of the second tier) are in a style of
magnificence which even the extravagance of Europe has not yet
equalled. I have one-third of box No. 8; Peter Schermerhorn one-
third; James J. Jones one-sixth; William Moore one-sixth. Our box is
fitted up with great taste with light blue hangings, gilded panels and
cornice, armchairs and a sofa. Some of the others have rich silk
ornaments, some are painted in fresco, and each proprietor seems
to have tried to outdo the rest in comfort and magnificence. The
scenery is beautiful. The dome and the fronts of the boxes are
painted in the most superb classical designs, and the sofa seats are
exceedingly commodious.'

This resplendent institution was opened on November 18, 1833,

under the joint management of da Ponte and the Chevalier Rivafinoli
—the latter being, according to da Ponte, 'a daring, but imprudently
daring, adventurer, whose failures in London and in Mexico and
Carolina, were the sure forerunners of his failure in New York.' The
season was advertised for forty nights, but there was a
supplementary season of twenty-eight nights. In addition there were
fifteen performances given in Philadelphia. Socially and artistically
the season was a distinct success, but financially it was a failure.
The operas performed were Rossini's La gazza ladra, Il barbiere di
Siviglia, La donna del lago, Il Turco in Italia, Cenerentola and Matilda
di Shabran, Cimarosa's Il matrimonio segreto, Paccini's Gli Arabi
nelli Gallie, and an opera called La casa di Pendere, by the
conductor, Salvioni.

During the same season there was also a period of English opera at
the Park Theatre, where 'Cinderella,' 'The Barber of Seville,' 'The
Marriage of Figaro,' 'Artaxerxes,' 'Masaniello,' 'John of Paris,' 'Robert
the Devil' (adapted and arranged), and other works were produced
with Mr. and Mrs. Wood as principal singers. 'The house,' according
to the 'American Musical Journal,' 'was crowded nightly.' The
management of the Park Theatre certainly presented a much more
varied and catholic program than was furnished by the Italian Opera
House; but we suspect shrewdly that variety was its chief distinction.

When Rivafinoli's enterprise collapsed, the Italian Opera House was

taken over by Porto and Sacchi—the latter treasurer and the former
one of the singers of the Rivafinoli company. The season opened on
November 10, 1834, with Bellini's La Straniera, and during its short
life Rossini's Eduardo e Christina, L'Inganno felice, L'Assedio di
Corinto, and Mosé in Egitto were also produced. It collapsed with the
sudden disappearance of the prima donna, Signora Fanti. The
Signora's defection, however, was rather the occasion than the
cause of its untimely end. One is tempted to say that the Italian
Opera House suffered from too much Rossini. But the real secret of
its failure lay in the fact that it was not in the fashionable section of
the city. The lure of art, reinforced by rich silk ornaments and
paintings in fresco, by 'superb classical designs' and 'exceedingly
commodious' sofa seats did not prove sufficiently strong to draw
society from the strictly defined path of its appointed orbit. The
valorous old da Ponte pleaded eloquently, but in vain. Abyssus
abyssum invocat, as he truly complained.

II
After a year of vacancy the Italian Opera House went to James W.
Wallack, father of the famous John Lester Wallack, and after a year
of the spoken drama it went up in smoke. For ten years Italian opera
in New York was as dead as the English queen whose demise is her
chief title to fame. But New York was not wholly barren of opera
during those years. In 1837 came Madame Caradori-Allan from
England to sing in oratorio, concert, and opera in New York, Boston,
Philadelphia, and elsewhere. She gave some operas at the Park
Theatre in 1838, including Balfe's 'Siege of Rochelle,' Bellini's La
Sonnambula, Rossini's Il Barbiere di Siviglia, and Donizetti's Elisir
d'amore, all in English. Also in 1838 a company which Dr. Ritter calls
'the Seguin combination' gave some operatic performances at the
National Theatre. He tells us that Rooke's opera, 'Amalie, or the
Love Test,' was performed for twelve consecutive nights before
crowded houses.[41]

Noteworthy were the efforts of an English company who in 1839

gave performances of Beethoven's Fidelio, Rossini's La Cenerentola
and La Gazza ladra, Bellini's La Sonnambula, Auber's Fra Diavolo,
Donizetti's Elisir d'amore, and Adam's Postilion de Lonjumeau.
This was by far the choicest operatic menu that had ever been
placed before New Yorkers. The performances were in English and
we are not enlightened as to their quality; we know only that the
venture was not a success. In 1840 the Woods returned with a
season of operas in English, including La Sonnambula, Fidelio, and
—sublime bathos—the 'Beggar's Opera'! Later the singer and
composer, Braham, beloved of Englishmen, appeared at the Park
Theatre in 'The Siege of Belgrade,' 'The Devil's Bridge,' 'The
Waterman,' and 'The Cabinet.' Except for the visits of the New
Orleans opera companies, of which we shall speak in another
chapter, these were the only operatic treats vouchsafed to New
Yorkers between the years 1834 and 1844.

In the meantime a gentleman named Ferdinand Palmo was making

quite a reputation as a cook and proprietor of the Café des Mille
Colonnes on Broadway, near Duane Street. Mr. Palmo suffered from
that ancient delusion known as 'opera for the people,' and under its
influence he spent the accumulated profits of the Mille Colonnes in
remodelling Stoppani's Arcade Baths, on Chambers Street, into a
popular opera house. There, in 1844, he opened a season of Italian
opera with Bellini's I Puritani. Mr. Palmo was certainly determined to
give New Yorkers the best that could be obtained. He had Madame
Cinti-Damoreau, whom Fétis described as one of the greatest
singers the world had known; he had a great tenor in Antognini,
whom Richard Grant White compares as a singer to Ronconi and as
an actor to Salvini; he had a very good soprano in Borghese. In
addition he had an orchestra of 'thirty-two professors.' He survived
the first season, but in the middle of the second the 'thirty-two
professors' went on strike for their wages and the sheriff's minions
descended on the box office receipts, the Mille Colonnes and
everything else attachable that Mr. Palmo possessed. The attempt at
a democratic opera was a fine and courageous one, but the time
was not ripe for such an effort.[42]

After Palmo's failure his theatre was taken over by a new company
which included among its principal members Salvatore Patti and
Catarina Barili, the parents of Carlotta and Adelina Patti. It had a
very brief existence and in 1848 Palmo's Opera House became
Burton's Theatre. In the meantime, however, New York had been
enjoying an assortment of other operas, presented by various visiting
companies. The most important of these was a French company
from New Orleans which, in 1843, presented La fille du régiment,
Lucia di Lammermoor, Norma, and Gemma di Vergy—in French, of
course. There were also several English companies, notably the
Seguins, who gave opera in English at the Park Theatre and
elsewhere. In 1844 the Seguin company produced Balfe's 'Bohemian
Girl' for the first time in America.

It has frequently been the lot of New York to be visited by Italian

opera companies from Cuba, Mexico, and South America. These
companies were sometimes very bad, sometimes indifferent,
sometimes very good. Of the last-named category was the company
brought from Havana by Señor Francesco Marty y Tollens in 1847.
Señor Marty was backed in his enterprise by James H. Hackett, the
actor, and William Niblo, proprietor of the famous gardens. He had a
very good company, notable chiefly for the fact that its conductor
was Luigi Arditi, composer of Il Bacio—the 'Maiden's Prayer' of
aspiring coloraturas. A season was given at the Park Theatre, after
which there were a number of extra performances at Castle Garden.
The repertory included Verdi's Ernani and I due Foscari, Bellini's
Norma and Sonnambula, Paccini's Saffo, and Rossini's Mosé in
Egitto. Señor Marty returned in 1848,1849, and 1850, with a
company which Max Maretzek described as the greatest ever heard
in America. The famous contrabassist, Bottesini, was musical
director and Arditi remained as conductor. Among the operas
performed were Verdi's Attila and Macbeth, Meyerbeer's Huguenots
and Donizetti's La Favorita.

Opera in English was still given frequently but without any regularity
at various theatres. Madame Anna Bishop appeared in a number of
operas in 1847, and during the same year W. H. Reeves, brother of
the famous Sims Reeves, made his operatic début. Among the
novelties produced was Wallace's Maritana. In 1850 Madame Anna
Thillon appeared in Auber's 'Crown Diamonds' at Niblo's and two
years later Flotow's 'Martha' was produced.

III
In the meantime, however, New York had launched one of the
greatest of operatic enterprises, a direct successor to the Italian
Opera House conceived and carried out by the old dreamer da
Ponte. Palmo's splendid experiment had only served to show that da
Ponte was right. Democratic opera was a delusion. Opera in Italian
or in any other language foreign to the mass of the people was
foredoomed to failure. Only the glamour of social prestige could save
it. And, just as opera needed society, so did society need opera. It
was out of the question, of course, that persons of social pretensions
should patronize Palmo's or Niblo's or Castle Garden or any other
place geographically outside the social sphere and appealing largely
to the common herd. Society is a jewel which shines only in an
appropriate setting. Hence one hundred and fifty gentlemen of New
York's social (and financial) élite got together and guaranteed to
support Italian opera in a suitable house for five years. On the
strength of this guarantee Messrs. Foster, Morgan and Colles built
the Astor Place Opera House, a theatre seating about 1,800
persons. 'Its principal feature,' said the slightly malicious Maretzek,
'was that everybody could see, and, what is of infinitely greater
consequence, could be seen. Never, perhaps, was any theatre built
that afforded a better opportunity for a display of dress.' The Astor
Place Opera House was opened in 1847, with Messrs. Sanquirico
and Patti, late of Palmo's, as lessees, and Rapetti as leader of the
orchestra. They produced during the season Verdi's Nabucco and
Ernani, Bellini's Beatrice di Tenda, Donizetti's Lucrezia Borgia, and
Mercadante's Il Giuramento. In 1848 the house was taken over by E.
R. Fry, an American, who brought over Max Maretzek as conductor
and gathered together a fairly good company, including M. and Mme.
Laborde. The operas given were Verdi's Ernani, Bellini's Norma, and
Donizetti's Linda di Chamouni, Lucrezia Borgia, L'Elisir d'amore,
Lucia di Lammermoor, and Roberto Devereux. Fry made a complete
failure, and, judging by his list, one is impelled to say he deserved it.

In 1849 Maretzek became lessee of the house and began that

chequered career as an impresario which ended only when the
Metropolitan so to speak shut its newly made doors in his face. Most
of his singers were taken from Fry's company, but he also had some
new ones, among them the Signora Bertucca, who was included in
the famous list which, according to Mr. H. E. Krehbiel, the
redoubtable Max invariably checked off on his fingers when
recounting his services to opera in New York. Maretzek remained at
the Astor Place Opera House until 1850, and during three seasons
gave Lucia, L'Elisir d'amore, Don Pasquale, Il Barbiere, Rossini's
Otello, I Puritani, Belisario, Ernani—the list is tiresomely familiar.[43]

In the meantime the Astor Place Opera House was leased to William
Niblo, the backer of Señor Francesco Marty y Tollens. Niblo's idea in
leasing the opera house was to eliminate it as a competitor. In
pursuance of this idea he engaged one Signor Donetti, and his
troupe of performing dogs and monkeys, whom he presented to the
aristocratic patrons of the institution. The patrons obtained an
injunction against Niblo on the ground that the exhibition was not
respectable within the meaning of the terms upon which the house
was leased. 'On the hearing to show cause for this injunction,' says
Maretzek, 'Mr. Niblo called upon Donetti or some of his friends who
testified that his aforesaid dogs and monkeys had in their younger
days appeared before princes and princesses and kings and
queens. Moreover, witnesses were called who declared under oath
that the previously mentioned dogs and monkeys behaved behind
the scenes more quietly and respectably than many Italian singers.
This fact I feel that I am not called upon to dispute.' Thus the
ambitions and exclusive Astor Place Opera House ended as a joke.
The building was used later as a library.

There is a peculiar resemblance between opera houses and human

beings. High hopes and ambitions mark the beginnings of both; but
the corrosive influences of life's practical everyday soon tarnish the
shining metal of their ideals until finally they are reduced to the dull
commonplace that marks the end of all created things. And, it may
be added, in the majority of cases the most powerfully corrosive
influence is money. An instance in point occurred in New York in
1852. It was another dream of democratic opera—or rather,
democratic music—a dream of a great new institution adapted to
American conditions wherein would germinate and grow to a brilliant
flowering the seeds of a national musical art. Truly a beautiful dream,
and one which, it might seem, should easily materialize in a country
so rich, so young, so eager, so progressive. A charter was obtained
from the state of New York authorizing the establishment of an
'Academy of Music for the purpose of cultivating a taste for music by
concerts, operas, and other entertainments, which shall be
accessible to the public at a moderate charge; by furnishing facilities
for instruction in music, and by rewards of prizes for the best musical
compositions.' American music-lovers were naturally gratified and
Mr. D. H. Fry, a prominent musical critic, ventured to hope that it
might 'yet come to pass that art, in all its verifications,' would 'be as
much esteemed as politics, commerce, or the military profession.
The dignity of American artists lies in their hands'—meaning, we
presume, the hands of the Academy promoters.

The dignity of American artists lay in very incompetent hands—

incompetent as far as the dignity of American art was concerned.
The commodious new Academy was leased to Max Maretzek, who
sub-leased it to J. H. Hackett, and it was opened in October, 1854,
with a company headed by Grisi and Mario. The showman
exploitation of great artists existed long before P. T. Barnum
exhibited Jenny Lind. The appearances of Henrietta Sontag at
Niblo's in La fille du régiment in 1850 and of Grisi and Mario at
Castle Garden in 1854 were purely and simply showman
enterprises.

In January, 1855, Ole Bull, the Norwegian violinist, took over the
management of the Academy, with the earnest intention of carrying
out the high purposes for which it was founded. As a first step to that
end he offered a prize of one thousand dollars for the 'best original
grand opera, by an American composer, and upon a strictly
American subject.' The phrase has become almost a formula. It is
unfortunate that idealistic enterprises in America always seek to fly
before they can walk. There was no American composer capable of
writing an original grand opera on any subject, neither was there a
public opinion cultivated enough to support such an enterprise as the
Academy. Within two months of Ole Bull's announcement, 'in
consequence of insuperable difficulties,' the Academy was forced to
close and the original grand opera by an American composer never
saw the light. The season was completed by the Lagrange company
from Niblo's, managed by a committee of stockholders, with
Maretzek as conductor.

III
A bright rift in the cloud that hung over operatic New York at that time
was the coming to Niblo's in 1855 of a German company, with Mlle.
Lehman (not, of course, the more famous Lilli Lehmann) as star.
Among the operas presented were Flotow's 'Martha,' Weber's Der
Freischütz, and Lortzing's Czar und Zimmermann.

In the following year the German company added Mme. Johannsen

to its forces, with Carl Bergmann as conductor, and presented,
among other operas, Beethoven's Fidelio. Bergmann remained as
conductor for several years and did an amount of pioneer work for
German opera in New York the importance of which has been
curiously ignored. It may be mentioned here, though a little in
advance of our narrative, that he introduced Wagner's Tannhäuser
for the first time in America at the Stadt Theatre, New York, in 1859.
The chorus was supplied by the Arion Männergesangverein.[44]

In 1855 Maretzek produced Rossini's 'William Tell' and Verdi's Il

Trovatore at the Academy. He had a good company which included
the soprano Steffanone—one of Señor Marty's singers—and the
tenor Brignoli, who became a great favorite with New Yorkers. A Mr.
Payne opened a season of forty nights there in the fall of 1855 and in
the following year Maretzek again became lessee. He soon
quarrelled with the proprietors of the Academy and went to Boston.
In January, 1857, Maurice Strakosch opened a season of Italian
opera with an indifferent company, but in March Maretzek
reappeared and set up an opposition at Niblo's. The next few
seasons were marked by an amount of activity in which control of the
operatic field was a consideration paramount to artistic achievement.
Maretzek, Strakosch, and the latter's aide, Bernard Ullman, were the
principals in an amusing campaign which, on more than one
occasion, saw the rival impresarios acting as partners. Strakosch
and Ullman opened the Academy season in the fall of 1857 with the
fascinating Emmilia Frezzolini in La Sonnambula. Carl Anschütz,
later of the Arion, was conductor. It was really a good season and,
though it saw no novelties, it was redeemed from the usual hurdy-
gurdy category by the production of Les Huguenots and Robert le
Diable. In March, 1858, 'Leonora,' by the American composer W. H.
Fry, was produced at the Academy under the bâton of Carl Anschütz.

Maretzek, in the meantime, was in Philadelphia with a company

headed by the famous buffo, Roncone. In 1858 he returned to New
York and opened a season at the Academy, while Strakosch took up
a stand at Burton's Theatre. Ullman came from Europe in October,
bringing with him the saucy and winsome Maria Piccolomini, whom
he advertised as a lineal descendant of Charlemagne and the great-
granddaughter of Schiller's hero, Max Piccolomini. As a showman
Ullman was second only to the great Barnum. Maretzek and Ullman
joined hands at the Academy in the fall of 1859 and presented
Adelina Patti in Lucia di Lammermoor.

For several years following there is nothing much to note. The

operatic situation was summed up in the alternate quarrels and
reconciliations of Maretzek, Ullman, and the brothers Maurice, Max,
and Ferdinand Strakosch, all of whom at various times have taken
occasion to speak of the sacrifices they made for Italian opera in
New York. As a matter of fact, opera was to all of them what the
green table is to the confirmed gambler. Yet they accomplished