UNSW-FINS3640-S2,2010-Week 6

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UNSW-FINS3640-S2,2010-Week 6

  1. 1. School of Banking and Finance www.banking.unsw.edu.au<br />
  2. 2. Stata Wrap-Up<br />
  3. 3. Robust Regression<br />reg y x1 x2, robust<br />
  4. 4. Residual Plot<br />reg y x1 ... xn, b<br />predict res, r<br />predict yhat<br />scatter res x1<br />sktest res<br />Read http://www.polsci.wvu.edu/duval/ps602/Notes/STATA/residuals.html<br />Right after running regression<br />
  5. 5. Part 1 of the course<br />Stata<br />Statistics<br />Multivariate modeling<br />Practical applications<br />Identify influential factors and patterns<br />Model and forecast stock performance and other business performance indicators (sales, NOPAT, growth, attrition...)<br />Reflect in stock selection, portfolio optimization and investment strategy<br />Example: "Do Wal-Mart, Target, Woolworths and Coles do well near Christmas?" You can test<br />
  6. 6. FINS3640 - Investment Management Modeling<br />Part 2<br />Week 6 - 25 Aug 2010<br />Introduction to using Excel and Matrix Algebra<br />for Financial Modeling<br />
  7. 7. Discrete return, excess return, continuous return, arithmetic return, geometric return<br />Matrix algebra<br />Normal distribution, cumulative distribution<br />Asset classes: Equity, Fixed income, Alternative asset classes (real estate, venture capital, private equity)<br />Index funds, large vs. small stocks<br />Standard deviation, variance, covariance, correlation, variance-covariance matrix, correlation matrix<br />Annualized values<br />Nominal rate<br />Utility function<br />Fixed income: term structure (market expectation, liquidity premium), duration, convexity<br />Equity and fixed income valuation models<br />Active and passive portfolio management<br />Efficient market hypothesis<br />Behavioural finance<br />Modern Portfolio Theory<br />Risk and Return<br />CAPM<br />Single-index model (SIM)<br />Efficient frontier with and without short-sale<br />Capital Market Line<br />Security Market Line<br />Portfolio Adjustments<br />Assumptions of each model<br />Revision (you should have known)<br />
  8. 8. Required Reading: Reeves J. J. 2008<br />Simon Benninga (SM), Financial Modeling 3e<br />Chapters 1, 8-13, 15, 18,25-29, 31, 33-35<br />http://finance.wharton.upenn.edu/~benninga/<br />Bodie Kane Marcus (BKM), Investments 8e<br />Chapters 1-9, 11-16, 18, 24-27<br />Other materials that cover the same concepts are accepted<br />http://www.mhhe.com/bkm<br />
  9. 9. James Farrell, Portfolio Management, 2e<br />Recommended Reading<br />Philippe Jorion, Value at Risk, 3e<br />http://merage.uci.edu/~jorion/<br />
  10. 10. Motivation: Why study Portfolio Management?<br />What funds do<br />Optimal inventory<br />
  11. 11.
  12. 12. Where would you be?<br />
  13. 13. Quantitative Approaches<br />
  14. 14. Assumption<br />Absence of transaction costs<br />
  15. 15. Arithmetic<br />
  16. 16. Number of trading days per year<br />#days per year = #days in observed period / #years<br />252 is generally accepted<br />
  17. 17. Returns<br />
  18. 18. Annualization<br />
  19. 19. Matrix Algebra using Excel<br />
  20. 20. Matrix Algebra<br />You should know<br />Scalar<br />Uniform matrix, identity matrix, diagonal matrix<br />Matrix addition and subtraction<br />Matrix multiplication<br />Matrix inversion<br />
  21. 21. Matrix Multiplication<br />m: number of rows<br />n: number of columns<br />
  22. 22.
  23. 23. VAR<br />VARP<br />STDEV<br />STDEVP<br />COVAR<br />CORREL<br />TRANSPOSE<br />SUMPRODUCT<br />MMULT<br />MINVERSE<br />Ctrl+Shift+Enter<br />
  24. 24. Week 6 Exercises<br />
  25. 25. Portfolio Expected Return & Variance<br />
  26. 26.
  27. 27.
  28. 28. Case<br />
  29. 29. One Stock Universe<br />
  30. 30. Annualized Return<br />
  31. 31. Variance-Covariance Matrix<br />We hence name variance-covariance matrix <br />
  32. 32. Efficient Frontiers with Excel Solver<br />
  33. 33. Activate Solver<br />
  34. 34.
  35. 35.
  36. 36.
  37. 37.
  38. 38.
  39. 39. Some Excel Techniques<br />
  40. 40. Enable Macros<br />
  41. 41. Ctrl+1<br />
  42. 42. Context Menu Bar: Select the object then observe the Ribbon<br />
  43. 43. Context Menu: Right-Click<br />

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