# Fall 2016 Computer Science 458 Lecture 8: 9/26/2016

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### Administrivia

Per piazza posting, Jieung Kim office hours: Monday and
Wednesdays, 5:30 pm to 7:30pm. AKW 311.
Submit process.
Wizards of Odds Discussion of blackjack odds. May give you some insight
into the problem in hw1.
We have the following guest speakers:
- Monday, September 26. Dr. John Niccolai, Citadel.
**Dinner 6pm**

Fed Panfilov (fp252)
Kenny Seals-Nutt (kes78)
Nidal Hishmeh (nh298)
Jack Siegel (js2985)
Alternate:
William Sun (wjs45)

Wednesday, September 28. Kayo Teramoto, Palantir. **Dinner 7PM!**
Fan Gao (fg299)
Yinfeng Zhang (yz683)
Chengyang Liu (cl938)
Vanessa Qiying Kuang(qk22)
Alternates:
Flora Qian Qiao (qq22)
Leesa Shiyang Xu (sx69)
Sean Lao (xl452)

**Select students for dinners**
### Assignment 1 and new Assignment 2

See Assignments
### Lecture

Modern Portfolio Theory
### Vocabulary

##### Statistics

volatility
variance [ var() ]
standard deviation [ sd() ]
mean [ mean() ]
random variable
correlation coefficient [ cor() ]
covariance [ cov() ]
##### Finance

stock = equity
bond = debt = fixed income
IPO = initial public offering
options (buy = call, sell = put)
derivatives (options, futures, forwards, swaps, credit default swaps, swaptions, mortgage backed securities [MBS], collateralized debt obligations [CDO's], CDO-squared)
Black Scholes option pricing model
efficient frontier
portfolio
asset classes (equity, fixed income, real estate, private equity,
venture capital, real estate, timber, jewelry store receivables,
rock band royalties)
time horizon
risk-free rate
transaction costs
Capital Allocation Line (CAL) == Capital Market Line (CML)
market portfolio
unsystematic risk
systematic risk
Capital Asset Pricing Model (CAPM)
Security Market Line (SML)
liquidity premium
Sharpe Ratio
Value at Risk (VAR)
Alpha
arbitrage
liquidity
market capitalization (market cap)
large cap, mid cap, small cap
basis points, bps, "bips"
leverage buy out (LBO)
junk bonds == high yield bonds
----
- Multi Strategy Funds
- G10
- On-the-run / off-the-run
- Basis point / bps / bips (beat the benchmark, haircut)
- IRS interest rate swap market, e.g., mortgages
- arbitrage
- BRICs
- EURUSD - exchange rates, FX. See
http://www.x-rates.com/
- Black-Scholes
- Exchanges: CME
- LIBOR - London Interbank Overnight Rate
- Bonds: TIPS, TBA, On-the-run 10y
- OTC - derivatives market
- Transparency: Exchange > Securities < OTC
- Sharpe Ratio
- PnL - Profit and Loss
- IRS swap has 200 fields
- Notional Value
- bullet / vanilla swap (Zero Present Value)
- Fed funds rate is a step function
- OIS - overnight index swap
- Monte Carlo
- [Black Swans]
- CAD swaps dataq is unreliable
- Capacity - can have a great strategy (Sharpe > 40) that does not scale.
- Spectrum of automation: Macro < Model Informed < Model Driven < Algorithmic < HFT
- Languages used at Citadel: C++, Python, C#, Excel.

##### Examples

Indices excercise data (2007):
xls
csv
R
Rplots.pdf

Which investment would you prefer? How could you create
a diversified portfolio from these investments that has
a better risk/return profile?

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