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

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Last updated: June 22, 2015

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. value-at-risk using the normal distribution for returns and continuously compounded returns
    6. covariance and correlation
    7. 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. empirical quantiles, histograms, boxplots, qq-plots
    2. historical value-at-risk
    3. 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. estimation of parameters

Topics to be emphasized on the Final Exam (Second Midterm)

Constant expected return model

  • estimation of parameters and standard errors

  • bootstrapping

  • rolling estimation

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?

Statistical Analysis of Efficient Portfolios

  • How can you use the bootstrap to evaluate estimation errors in efficient portfolio weights, expected returns and volatilities?

  • Rolling analysis of efficient portfolios

Final Exams