ECON 424/AMATH 462:  Introduction to Computational Finance and Financial Econometrics

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Last updated: March 14, 2013

The final exam will cover all the material from the course syllabus. The final exam will be concept oriented but there will also be some calculation involved so bring a calculator. I will not ask you to do proofs or long derivations. The best place to start your studying is with the homework assignments. Solutions for the homework assignments are on the homework page. Check the Notes page for updates of the class lecture notes.

The exams will be closed book and closed note exam. However, I will allow one page (double sided) of handwritten or typed notes

Topics to be covered for the Midterm

1. Return calculations
   1. simple and continuously compounded returns
   2. time aggregation
2. Review of random variables
   1. Shape characteristics (mean, variance, skewness, kurtosis)
   2. quantiles
   3. normal distribution
   4. linear functions of random variables
   5. covariance and correlation
   6. characteristics of portfolios with risky assets
3. Matrix Algebra
   1. Compute portfolio expected return and variance using matrix algebra
4. Time Series Concepts
   1. covariance stationarity
   2. Autocorrelations
   3. MA(1) and AR(1) models
5. Descriptive statistics
   1. histograms, boxplots, qq-plots
   2. sample statistics (univariate, bivariate, time series)
6. Constant expected return model
   1. model assumptions and interpretation
   2. relationship to random walk model
   3. Monte Carlo simulation
   4. bootstrapping
   5. estimation of parameters and standard errors
   6. hypothesis testing
   7. rolling estimation
7. Maximum likelihood estimation

• Here is an old take-home midterm exam.
• Here is an in class midterm exam from summer 2000.
• Here is an in class midterm exam from summer 2001. 
• Here is an in class midterm exam from winter 2002. Here are the solutions.
• Here is an in class midterm exam from fall 2003. Here are the solutions.
• Here is an in class midterm exam from fall 2004. Here are the solutions.
• Here is an in class midterm exam, with solutions,  from spring 2006.
• Here is an in class midterm exam, with solutions,  from spring 2007.
• Here is an in class midterm exam, with solutions,  from Fall 2008.
• Here is an in class midterm exam, with solutions,  from Fall 2009

Topics to be emphasized on the Final Exam

Introduction to portfolio theory

• characteristics of portfolios with risky and riskless assets
• portfolio frontier
• efficient portfolios
• global minimum and tangency portfolios

Portfolio Theory with Matrix Algebra

• Express Markowitz algorithm for finding efficient portfolios using matrix algebra
• Express Markowitz algorithm for finding efficient portfolios with no short sales

Risk Budgeting and Beta as a Measure of Portfolio Risk

• What is Euler's theorem?

• How can you additively decompose portfolio SD into asset specific components?

• How do you interpret asset marginal contributions to SD?

• How is beta related to asset contributions to portfolio SD?

Single Index Model 

• Can you interpret the single index regression: R_i  = a_i + b_i*R_m + e_i ?
• How do you decompose asset variance into market variance and non-market variance?
• How do you compute the covariance matrix using the single index model?
• How do you estimate beta in the single index model?

Final Exams

• Here is an old final exam (1999)
• final exam: winter 2001 and solutions.
• final exam: fall 2003 and solutions.
• final exam: fall 2004 and solutions.
• final exam: spring 2006 and solutions.
• final exam: fall 2006 with solutions.
• final exam: fall 2007 with solutions.
• final exam: fall 2008 with solutions.