Economics 424: Introduction to Computational Finance and Financial Econometrics

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Last updated: November 4, 2009

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

Return calculations
1. simple and continuously compounded returns
2. time aggregation
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
Matrix Algebra
1. Compute portfolio expected return and variance using matrix algebra
Time Series Concepts
1. covariance stationarity
2. Autocorrelations
3. MA(1) and AR(1) models
Descriptive statistics
1. histograms, boxplots, qq-plots
2. sample statistics
Constant expected return model
1. model assumptions and interpretation
2. relationship to random walk model
3. estimation of parameters
4. properties of estimators - bias and precision
5. estimating standard errors - analytic formulas and the bootstrap
6. confidence intervals
7. bootstrapping

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

Single Index Model

Can you interpret the single index regression: R_i= a_i + b_i*R_m + e_i ?
How do you compute the covariance matrix using the single index model?
Estimating beta from observed return data
- How do you use least square regression?
- How do you interpret R-square from the regression?
- How do you interpret the standard error of the regression?
- How are regression results for portfolios different than regression results for individual assets?
- How do you compute the beta for a portfolio?
- How do you interpret beta as a measure of portfolio risk? That is, what does it mean for an asset to have a beta less than 1, a beta greater than 1 and a beta equal to 1?
Suppose you compute the beta of an asset with respect to the tangency portfolio. What is the relationship between the expected return on the asset and the beta with respect to the tangency portfolio?

CAPM

How is the CAPM related to portfolio theory?
What are the assumptions behind the CAPM?
What are the main implications of the CAPM?

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.