This document summarizes topics related to portfolio management and financial modeling. It discusses robust regression in Stata, residual plots, and identifying influential factors using multivariate modeling. It introduces concepts for part 2 of the course like discrete and continuous returns, matrix algebra, asset classes, and standard measures like standard deviation and correlation. Key models are discussed like the CAPM, security market line, efficient frontier, and modern portfolio theory. Excel skills are taught like using matrix functions to calculate returns, variance, covariance and the efficient frontier using Solver.

1. School of Banking and Finance www.banking.unsw.edu.au

2. Stata Wrap-Up

3. Robust Regression reg y x1 x2, robust

4. Residual Plot reg y x1 ... xn, b predict res, r predict yhat scatter res x1 sktest res Read http://www.polsci.wvu.edu/duval/ps602/Notes/STATA/residuals.html Right after running regression

5. Part 1 of the course Stata Statistics Multivariate modeling Practical applications Identify influential factors and patterns Model and forecast stock performance and other business performance indicators (sales, NOPAT, growth, attrition...) Reflect in stock selection, portfolio optimization and investment strategy Example: "Do Wal-Mart, Target, Woolworths and Coles do well near Christmas?" You can test

6. FINS3640 - Investment Management Modeling Part 2 Week 6 - 25 Aug 2010 Introduction to using Excel and Matrix Algebra for Financial Modeling

7. Discrete return, excess return, continuous return, arithmetic return, geometric return Matrix algebra Normal distribution, cumulative distribution Asset classes: Equity, Fixed income, Alternative asset classes (real estate, venture capital, private equity) Index funds, large vs. small stocks Standard deviation, variance, covariance, correlation, variance-covariance matrix, correlation matrix Annualized values Nominal rate Utility function Fixed income: term structure (market expectation, liquidity premium), duration, convexity Equity and fixed income valuation models Active and passive portfolio management Efficient market hypothesis Behavioural finance Modern Portfolio Theory Risk and Return CAPM Single-index model (SIM) Efficient frontier with and without short-sale Capital Market Line Security Market Line Portfolio Adjustments Assumptions of each model Revision (you should have known)

8. Required Reading: Reeves J. J. 2008 Simon Benninga (SM), Financial Modeling 3e Chapters 1, 8-13, 15, 18,25-29, 31, 33-35 http://finance.wharton.upenn.edu/~benninga/ Bodie Kane Marcus (BKM), Investments 8e Chapters 1-9, 11-16, 18, 24-27 Other materials that cover the same concepts are accepted http://www.mhhe.com/bkm

9. James Farrell, Portfolio Management, 2e Recommended Reading Philippe Jorion, Value at Risk, 3e http://merage.uci.edu/~jorion/

10. Motivation: Why study Portfolio Management? What funds do Optimal inventory

12. Where would you be?

13. Quantitative Approaches

14. Assumption Absence of transaction costs

15. Arithmetic

16. Number of trading days per year #days per year = #days in observed period / #years 252 is generally accepted

17. Returns

18. Annualization

19. Matrix Algebra using Excel

20. Matrix Algebra You should know Scalar Uniform matrix, identity matrix, diagonal matrix Matrix addition and subtraction Matrix multiplication Matrix inversion

21. Matrix Multiplication m: number of rows n: number of columns

23. VAR VARP STDEV STDEVP COVAR CORREL TRANSPOSE SUMPRODUCT MMULT MINVERSE Ctrl+Shift+Enter

24. Week 6 Exercises

25. Portfolio Expected Return & Variance

28. Case

29. One Stock Universe

30. Annualized Return

31. Variance-Covariance Matrix We hence name variance-covariance matrix 

32. Efficient Frontiers with Excel Solver

33. Activate Solver

39. Some Excel Techniques

40. Enable Macros

41. Ctrl+1

42. Context Menu Bar: Select the object then observe the Ribbon

43. Context Menu: Right-Click