Course Project and Report - University of Southern California



USCMarshallSchool of BusinessFBE 506b Quantitative Methods in Finance – 1.5 unitsFall 2018Class Lectures: Th, 5:00 – 6:20 pmProfessor: M. SafarzadehOffice Hours: TuTh 2:00 - 3:00, Th 4:00 - 5:00 and by appointmentOffice: HOH 228Email: safarzad@marshall.usc.eduCourse Description:FBE 506b is the second half of a 2-part course in advanced quantitative finance, where students are exposed to various multivariable mathematical and statistical techniques used in investment theory, and get hands-on practice by applying different models to financial data. Learning Objectives:Students successfully completing this course will be able to:1. Learn the basics of matrix algebra and multivariable differentiation and their application in finance.2. Use financial data to construct variance-covariance matrix of several stocks for use in Modern Portfolio Theory. 3. Combine several stocks into a portfolio and optimize the risk and return relation of the portfolio by minimizing the risk for an expected return or by maximizing return for an assumed risk tolerance.4. Calculate the statistics used in pricing of complex securities such as American and European options. 5. Build economic and financial models, collect data and apply statistical methods for estimating the model, hypothesis testing, and forecasting. Required Material: Required textbook for the course is, Quantitative Methods in Finance: Market Risk Analysis I, by Carol Alexander, John Wiley & Sons Ltd, 2010, ISBN: 978-0-470-99800. There is no perfect textbook that would systematically cover all the topics discussed in this course. Therefore, topics not covered by the textbook will be supplemented by handouts in the class or by the notes posted on Blackboard. For students who may need more detailed description of the statistical concepts, a recommended book is Statistics for Business and Economics, 12e, by Anderson, Sweeney and Williams, Cengage, ISBN: 978-1-133-27453-7. I have listed the relevant chapters or sections of the book in the course outline under ASW. As well, you have to have access to one of the following statistical software to be able to complete the course assignments. These statistical software in order of user friendliness are, E-Views by Quantitative Micro Software; , Stata; , or R; . You should also make yourself familiar with the statistical package of MS Office, especially the Solver. You are required to be sufficiently familiar with the topics assigned for each class meeting prior to the class so that they can intelligently be discussed and practiced in the class. Grading Policy:The course grade will be computed based on the following table:Points % of GradeThree HW assignments, each 25 points 75 15%Course project and report 100 20%Midterm Exam 150 30%Final Exam175 35%Total500 100%HW AssignmentsThere will be three homework assignments each worth 5% of the course grade. Completed homework assignments should be returned to me in the class on time. No late HW will be graded. If you miss the HW deadline a score of zero will be assigned to HW. The tests in the mid-term exams and the final exam will be similar to the homework assignments. Therefore, I highly recommend that you work on the assignments and learn by doing. You my work with other student in a group or consult with other students in doing HWs. However, copying other students’ work is absolutely forbidden. Homework assignments will be posted at the Assignment section of the course site on Blackboard.Midterm ExamThere will be one midterm exam. It will be worth 30% of the course grade and will test all the material covered up to the exam. If you miss the exam for any reason other than medical emergency, a score of zero will be assigned to the exam. If you miss the exam on account of a proven medical emergency a makeup exam should be arranged as soon as the medical emergency is over. Final ExamThe final exam will be comprehensive but will emphasize the material covered after the midterm. The final exam will be worth 35% of the course grade. If you miss the final exam for a medical emergency reason that can be documented and verified, there will be a makeup final to be arranged as soon as possible. Otherwise, a grade of zero will be assigned to the final exam. All the exams in this course are closed notes and closed book.Course Project and ReportYou are required to work on one applied project. The project will concentrate on the application of the techniques taught during the semester to a portfolio that you will construct. The project will be an ongoing project and you will be asked to report the progress of the project from time to time. Select at least five stocks from five different industries (for the list of the firms in different industries see, ). Using monthly adjusted closing prices of the stocks from January 2, 2014 to present allocate a hypothetical amount ($100) on the selected securities. Apply the techniques learned in the class to your portfolio as the course proceeds. You are required to report a summary of your work and the results as they progress. The idea behind this assignment is to apply the quantitative skills learned in this course to the portfolio index of your own construction. The project will be worth 100 points and will be graded as any test is graded. You have to show your knowledge of the subject matter as well as the skills in applying the quantitative methods in analyzing and explaining statistical results. You are required to submit your names and the list of the selected securities no later than the second week of the semester.Academic ConductPlagiarism – presenting someone else’s ideas as your own, either verbatim or recast in your own words – is a serious academic offense with serious consequences. Please familiarize yourself with the discussion of plagiarism in?SCampus?in Part B, Section 11, “Behavior Violating University Standards” . ?Other forms of academic dishonesty are equally unacceptable.? See additional information in?SCampus?and university policies on scientific misconduct,? SystemsStudent Counseling Services (SCS) - (213) 740-7711 – 24/7 on callFree and confidential mental health treatment for students, including short-term psychotherapy, group counseling, stress fitness workshops, and crisis intervention. Suicide Prevention Lifeline -?1-800-273-8255Provides free and confidential emotional support to people in suicidal crisis or emotional distress 24 hours a day, 7 days a week. & Sexual Violence Prevention Services (RSVP) - (213) 740-4900 - 24/7 on callFree and confidential therapy services, workshops, and training for situations related to gender-based harm. Assault Resource CenterFor more information about how to get help or help a survivor, rights, reporting options, and additional resources, visit the website: of Equity and Diversity (OED)/Title IX compliance – (213) 740-5086Works with faculty, staff, visitors, applicants, and students around issues of protected class. Assessment Response and SupportIncidents of bias, hate crimes and microaggressions need to be reported allowing for appropriate investigation and response. Support & Advocacy – (213) 821-4710Assists students and families in resolving complex issues adversely affecting their success as a student EX: personal, financial, and academic. at USC – Tabs for Events, Programs and Training, Task Force (including representatives for each school), Chronology, Participate, Resources for StudentsUSC Emergency InformationProvides safety and other updates, including ways in which instruction will be continued if an officially declared emergency makes travel to campus infeasible.? Department of Public Safety??–?UPC: (213) 740-4321 – HSC: (323) 442-1000 – 24-hour emergency or to report a crime.Provides overall safety to USC community.? Grades:A mark of IN (incomplete) may be assigned when work is not completed because of a documented illness or other “emergency” that occurs after the 12th week of the semester (or the twelfth week equivalent for any course that is scheduled for less than 15 weeks). An “emergency” is defined as a serious documented illness, or an unforeseen situation that is beyond the student’s control, that prevents a student from completing the semester. Prior to the 12th week, the student still has the option of dropping the class. Arrangements for completing an IN must be initiated by the student and agreed to by the instructor prior to the final examination. If an Incomplete is assigned as the student’s grade, the instructor is required to fill out an “Assignment of an Incomplete (IN) and Requirements for Completion” form () which specifies to the student and to the department the work remaining to be done, the procedures for its completion, the grade in the course to date, and the weight to be assigned to work remaining to be done when the final grade is computed. Both the instructor and student must sign the form with a copy of the form filed in the department. Class work to complete the course must be completed within one calendar year from the date the IN was assigned. The IN mark will be converted to an F grade should the course not be completed.Course Outline:The following course outline will be followed in a lecture format, but with sufficient flexibility to alter allotted time and emphasis as questions arise. From time to time, class will be conducted on application and discussion format. - CA, Carol Alexander’s Textbook - MS, Safarzadeh – Mathematical Methods in Economics - ASW, Anderson-Sweeney-Williams - BB, Blackboard Topics/Daily ActivitiesReadings Deliverables & Due DatesWeek 18/ 23________Week28/30Matrix Algebra for Finance: a. Laws of Matrix algebra b. Singular Matrix, Inverse Matrix, Quadratic Forms, Definite Matrices c. Eigenvalues and Eigenvectors____________________________________________________________Multivariate Functions: a. Differentiation Rules b. Optimization: Constrained, Unconstrained c. Partial Derivatives d. Difference Equations and Dynamic ModelsCA, Chapter 2: 2.1 - 2.7MS, Chapter 3______________MS, Chapter 4Week 39/6___________Week 4 9/13 Applications of Matrix Algebra to Linear Portfolios: a. Portfolio Risk and Return in Matrix Notation b. Positive Definiteness of Covariance and Correlation Matrices c. Optimal Portfolio Allocation using Matrix Algebra: The Case of n Assets.____________________________________________________________ d. Principal Component Analysis e. Principal Component Analysis of European Equity IndicesCA, Chapter 2: 2.6______________BB: Notes on Principal ComponentDue: Week 3 Project topic and abstract____________Due: Week 4Assignment #1Week 59/20________Week 69/27Introduction to Regression Analysis: a. Simple Linear Regression Model. b. Assumptions of Classical Regression Models. ___________________________________________________________ c. Statistics of Simple Linear Regression d. Qualitative Independent VariablesCA, Chapter 4: 4.2 – 4.4BB: Notes on Regression______________BB: Notes on RegressionWeek 710/4________Week 810/11 Review for Midterm____________________________________________________________ Test #1______________BB: Notes on Efficient Market HypothesisDue: Week 7Assignment #2__________Week 910/18________Week 1010/25Application of Regression in Business and Finance: a. Estimating Jensen and coefficients of the CAPM. b. Estimate Security Market Line (SML) to calculate cost of Equity. ____________________________________________________________ c. Event Study d. Tests of Random Walk and Efficient Market Hypothesis CA, Chapter 6: 6.3 – 6.5______________CA, Chapter 6: 6.3 – 6.5BB Notes on Event StudyWeek 1111/1________Week 1211/8Introduction to Forecasting a. Smoothing Techniques (MA, WMA, ES, Kalman Filter, Hodrick-Prescott Filter). b. Using Regression for Forecasting____________________________________________________________Introduction to Forecasting: cont. c. Using Smoothing Techniques for Forecasting d. Measures of Forecasting Accuracy (MAD, MAPE, RMSE, MASE).Decomposition Techniques: a. Estimating Trend, Seasonal, Cyclical, and Autocorrelation Components of a Financial or Economic Data. b. Deterministic and Stochastic Trends CA, Chapter 5 ASW, Chapter14BB: Notes on Forecasting______________Week 1311/15______11/22______Week 1411/29Decomposition Techniques: cont. b. Using Smoothing Techniques for Forecasting Return and Volatility of an Asset. c. Using Smoothing Techniques to de-trend or de-seasonalize Data___________________________________________________________ Thanks Giving____________________________________________________________Experimental Design and Analysis of Variance: a. Introduction to Experimental Design and ANOVA. b. ANOVA and Completely Randomized Design. c. Two and Three Factors ANOVA Application in Finance and EconomicsCA, Chapter 4: 4.4 - 4.6____________________________ASW, Chapte13: 13.1 - 13.3Due: Assignment #3___________Due: beginning of Lecture 14ProjectWeek 1512/6 Final Exam Thursday, December 6th, 4:30 – 6:30Data Sources: and (for stock prices). (list of firms by industry). (global financial data) (banking, interest rate, …)bea. (labor data, macroeconomic data)lib.umich.edu/libhome/documents.center/stats.html (surveys of consumers and consumer confidence) (international monetary fund) (stock market, money supply, interest rate, …) (interest rate, foreign exchange rate, consumer credit, …) ................
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