Bridging Academics from the Classroom to Practice

New Class for NC State’s Financial Mathematics Graduate Program: Practical Portfolio Management.

The Masters of Financial Mathematics at NC State is offering a new course, Practical Portfolio Management.  This course is about bridging the gap between academic knowledge/modeling and the practice of managing a portfolio. If you are a student studying in a quant/finance field, you might have asked yourself questions like "how can I apply this theorem in practice?" or "how practitioner operate things in practice?" These questions are critical to successfully moving your academic knowledge from the classroom to the workplace.

The course starts by considering what contributes to the risk premium; business risk, financial risk, liquidity risk, exchange rate risk, and/or political risk. Students make their own asset allocation decisions, by first creating their own policy statement, creating an initial portfolio, then rebalancing their portfolio on a weekly basis.

currency rates

Portfolios can be composed of a wide variety of assets, such as the S&P 500 Index, Equity ETFs, Treasury bonds, Stocks, and etc., is a typical example. The course will cover the pros and cons of quantitative tools.  Decisions to adjust portfolios or asset allocations may be based on the managers’ view, or on more quantitative algorithmic strategies implemented in R (portfolio-trading) or Python (see crowdsourcing ideas leader Quantopian).

portfolio dashboard

A critical aspect of managing their portfolio is the justifications for the asset allocation and rebalancing decisions.  The decisions will be influenced by the rapidly evolving financial landscape, and will necessitate considerations of events that can have strong impacts on your portfolio, such as Brexit (see discussions by Schwab and Forbes), Greece returning to debt markets, and the November elections in the US.

profit target

The course will have a nontraditional structure.  The traditional lecture-homework-exam structure is replaced by actively managing their $100,000,000 portfolio throughout the semester. Similar courses are sometimes offered through extension courses, such as Options, Trading and Strategies at UCB and Strategic Portfolio Decisions at Stanford.

Richard Ellson

Dr. Richard Ellson created this course.  He recently joined NC State’s Masters of Financial Mathematics as an Adjunct Associate Professor. Dr. Ellson’s career started as a tenured professor at the University of South Carolina.  He was recruited to work at Wall Street firms and spent 25+ years in the finance industry. Richard has worked in several areas, and has deep experiences in residential whole loan mortgages and agency/non-agency mortgage-backed securities. His broad experience in research, trading/hedging, structured finance (domestic and foreign), and product development will guide FM students to success in their prospective career.

Textbook:  Analysis of Investments and Management of Portfolios. Keith C. Brown, Frank K. Reilly, 10th edition.

More about Dr. Ellson: http://www.ellsonconsulting.com

blog post created by J. Scroggs and Daihon Kwon.

 

Re-cap of Hedge Fund Challenge 2014

By Dendi Suhudby, May 2016 graduate

A couple of weeks ago a few students in the Financial Math program decided to attend the local Hedge Fund Challenge held nearby at the Washington Duke Inn in Durham. Once we heard about this event from local alumni and current students, we immediately became interested. I researched the event to learn that it was a challenge to pitch an investment strategy for a new startup hedge fund. This really sparked my interest, because hedge fund structures allows us to find strategies in broad range of asset classes compared to, for instance, finding investment strategies for mutual funds or traditional investment vehicles.

morgancreek2

I attended the event with our Program Director, Dr. Scroggs and current student, Bingxi Du (both pictured above). The other participating teams were from Duke, UNC Chapel Hill, Eastern Carolina University, University of Richmond, and Elon University. There were 5 scheduled speakers to gave lectures about 5 main points of an investment strategy buildup:

1. Idea generation

2. Valuation

3. Macroeconomic Analysis

4. Risk Management

5. Trade Structuring

Here are the summaries of the speakers lecture.

1. Idea generation

Idea generation is all about the brainstorming and finding inefficiencies in several asset classes for an opportunity to take an advantage for convergence of mis-pricing. For an example, in an idea generation there may be due diligence from a researcher, portfolio manager and the investor relations on the company’s on going corporate strategies. There might be more indirect idea generation by looking at data from Bloomberg and making a quantitative analysis pattern on data.

2. Valuation

The part of the valuation is where you pull up a spreadsheet and try to predict the outcome of the investment strategy in todays time. In finance lingo, it is the process to project future cash-flows and discount back to todays present value. The highest valuation of the investment opportunities are then chosen.

3. Macroeconomic Analysis

Macroeconomic analysis is done to find the possible directions of the environment say for example of interest rates, or business policies that are favorable for specific industries.

4. Risk Management

The portfolio manager and the buy side researcher then finds possible deviations of outcomes through risk analysis. For example using scenario analysis, they would scenario the investment strategy if there is a deviation of parameters within their models that change the outcome of investments. Within this process, the portfolio managers also find ways to hedge the investment if something goes in an adverse way or how to completely liquidate the investment if it is on loss.

5. Trade Structuring

After doing all those above, then portfolio managers make the decision to structure their trade either 1) buying the underlying asset or 2) enter a derivative contract. For example, if a portfolio manager has the view that the interest rates would increase he/she might want to short bonds or has the possibility to enter in interest rate future contracts in the Chicago Mercantile Exchange or even enter an OTC Credit Default Swap. Even these three investment strategy are betting on an increase in interest rate; there are several things that needs to be decided such as liquidity of each asset (futures liquidity > CDS liquidity > bond liquidity) where the future asset class might be more favorable than shorting the bond.

audienceHFchallenge

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The main conclusion of the kickoff event and the hedge fund lectures are that to conduct a trade takes a lot of effort, brainstorming, quantitative analysis, and due diligence, differs far from the public opinion that a hedge fund bets on reckless investments. Hedge funds also are much more flexible than other fund structures because of its unregulated nature, and it can also invest in exotic investment structures that mutual funds cannot invest in.- Dendi Suhudby.

Test drive the Quantitative Finance BETA site from Stack Exchange

Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. This website http://quant.stackexchange.com/ covers questions on real-life problems you face such as:

  • securities valuation
  • risk modeling
  • market microstructure
  • portfolio management
  • financial engineering
  • econometrics

And this is not a discussion forum...Quantitative Finance Stack Exchange is all about answers. Pretty straight forward- Ask a question, get an answer! Great resource to check out while it is in BETA.

Other resources for Quantitative Finance:

1. Wilmott.com

Wilmott.com is a quantitative financial portal created by Paul Wilmott. One can find job postings, technical articles, up-to-date news, and other useful resources.

http://www.wilmott.com/

2. QuantStart

QuantStart is a personal website discussing Algorithmic Trading strategy research, development, backtesting and implementation. The author behind this website once worked in a hedge fund as a quantitative trading developer in London. Therefore, his articles are very practical. There are several articles on career development, which are very useful for those unfamiliar with the industry.

http://www.quantstart.com/

3. QuantLib

The QuantLib project is aimed at providing a comprehensive software framework for quantitative finance. QuantLib is a free/open-source library for modeling, trading, and risk management in real-life. It is written in C++ with a clean object model, and is then exported to different languages such as C#, Objective Caml, Java, Perl, Python, GNU R, Ruby, and Scheme.

http://quantlib.org/

4. Yahoo Finance

You can get free stock quotes, option prices, up to date news, portfolio management resources, international market data, message boards, and mortgage rates from here.

http://finance.yahoo.com/

5. Data and Charts of U.S. Department of the Treasury

Great resource to find all kinds of interest rates related with the U.S. treasury.

http://www.treasury.gov/resource-center/data-chart-center/Pages/index.aspx

6. QuantNet

It is a leading resource on Financial Engineering education and news, but the main focus is education. Quantnet provides detail information about Financial Engineering programs in North America.

https://www.quantnet.com/

*****
By- Xiaohong Chen, Financial Math Intern, May 2015 Graduate