Finance 2324 -- Portfolio Management
Dr. David Nawrocki
Villanova School of Business
Department of Finance
Office: 2020 Bartley Hall next to Finance Department Office
Office Hours: by appointment on TTh afternoons by Zoom meetings (and other times by appointment)
Phone: 610-519-4323 (Don't bother to call - email me - I answer emails 7 days a week.)
Course Website: http://www.homepage.villanova.edu/david.nawrocki
1. Modern Portfolio Theory, Most Recent Edition, Elton & Gruber (EG), Required.
2. Tuva or Bust, Ralph Leighton and Richard Feynman, Required.
3. Surely You're Joking, Mr. Feynman, Richard Feynman and Ralph Leighton, Required.
4. The Money Game, Adam Smith (Pen name for George Goodman), Required. (Check Amazon.)
5. Portfolio Management Software Package., David Nawrocki, Computer Handholders, Required.
This course will cover advanced topics in investment management and modern portfolio theory (MPT) including regression analysis, risk measurement, portfolio allocation algorithms, decision systems, international diversification and utility theory. Much of this material is covered in Level 3 of the CFA exam. The course stresses application of statistical techniques through the use of appropriate computer packages. The student is expected to use the computer heavily in order to apply and learn the techniques that are covered in class. The course places a heavy stress on teaching yourself how to learn. The emphasis is on learning and doing research.
Prerequisites include Fin2323 Equity Markets, Stat I and II, Fin 2227 Fixed Income Markets, VSB Computer class, and Senior Year Standing.
It is the students responsibility to be certain that the prerequisites have been successfully completed. If at any time during the semester it is determined that a student has not completed the prerequisites, the student can be administratively dropped from the course without credit or tuition refund.
Attendance is expected and heavily recommended. The computer projects and the final exam are from classroom lecture material. Textbook and handout materials are for reference. I reserve the rightto make changes in the assignments, lectures and dates. Please make sure that you attend class to keep up-to-date with any changes.
1. Modeling and Decision Systems ...............Lecture
a. Decision Support Systems, Learning, Artificial Intelligence
2. Portfolio Management
b. Measuring Return, Sources of Information..(EG)Ch.1,2,3
c. Fundamental Screening of Stocks...........Lecture
d. Efficient Frontier Diversification........(EG) Ch.4,5,6,7,8,9
e. Adjustments for Forecasts.................Lecture, (EG) Ch 19
f. Utility Theory............................(EG) Ch.10,11
g. Portfolio Evaluation......................(EG) Ch.24,25,26
h. Option Pricing and Portfolio Insurance....(EG) Ch.22,Lecture
i. Macroeconomic (Business) Cycles...........Lecture
j. Portfolio Revision and Top-Down Investing .............. Lecture
k. International Diversification.............(EG) Ch. 12
l. Bond Management, Duration, and Futures....(EG) Ch.20,21,23
Overview of Portfolio Management Process
Artificial Intelligence Decision Model Based on Ashby's Design for a Brain
Ashby, William. Design for a brain: The origin of adaptive behaviour. Springer Science & Business Media, 2013.
30% First Term Paper - Read both Feynman and the Adam Smith books - Write a book report/essay on learning and portfolio theory using CRSP and PMSP. Due Thursday October 6.
30% Second Term Paper - MarketBase and PMSP - One Period Portfolio Optimization. Due November 17.
40% Third Term Paper - Using MarketBase, PMSP, REVISE - Portfolio Revision. Due Sunday December 18.
Method of Instruction - Class Lecture, Outside Reading, Outside Preparation of Projects. I do not use a rubric for grading. I grade on the quality of your exploration and research of portfolio theory techniques. Recordings of Zoom lectures will be available on Blackboard later in the evening of the class day.
Papers are due by midnight by email on the due date. The final paper is due during finals week. The date will be set later in the semester. Late papers will have reduced grades based on degree of lateness (12% penalty per week). The Finance departmental office will accept papers and time/date stamp them (not during the Pandemic). There will be NO acceptable excuses for late papers or missed exams. All papers handed in when I am not present have to be date/time stamped by a secretary or faculty member. Incomplete papers will have reduced grades based on the degree of completeness.
You ARE to work in teams of two (with one group of three if we have an odd number of students). Papers with similar computer results or with similar presentations or similar styles will be downgraded at the discretion of the professor. The professor reserves the right to give an F Grade to any paper that he feels has violated the conditions as stated on this course outline. There will NOT be a group grade on the term papers unless all members of the group sign a petition for a group grade. Each student's grade will be based on their section of the paper. Dishonesty in these assignments WILL result in a grade of F.
You are expected to operate according to professional standards of ethics - the same ethics you would be expected to follow on investment research reports in the real world. On each paper, a statement to the effect that the paper contains only your work (and not the work of other students both past and present) is required for ALL PAPERS. In addition, each student has to sign or initial his/her section of the paper. Each section of the paper has to be identified as the work of a particular student. The person who signs for a section of the paper is solely responsible for that section (all of the good and all of the BAD). You and your partner may petition for a group grade by following the honor statement procedure. Papers without an honor statement will be considered late until the honor statement is submitted. Your senior year is NOT the time to be taking ethical short-cuts. I will put a hold on your diploma for cheating. Honor statements are be signed by hand, photo scanned using your phone and emailed to me.
The Code of Academic Integrity of Villanova University addresses cheating, fabrication of submitted work, plagiarism, handing in work completed for another course without the instructors approval, and other forms of dishonesty. For the first offense, a student who violates the Code of Villanova University will receive 0 points for the assignment. The violation will be reported by the instructor to the Deans office and recorded in the students file. In addition, the student will be expected to complete an education program. For the second offense, the student will be dismissed from the University and the reason noted on the students official transcript.
The papers are to be typed, double spaced with any references and footnotes collected at the end of the paper. Information from computer printouts should be organized into tables and graphs which are to be integrated into the text of the paper. Appendices are UNACCEPTABLE. Failure to meet these standards as well as poor grammar and spelling will result in letter grade drops for each violation. Papers are as long as you need them to be to convey the desired information. Papers that provide class notes or tutorials in statistics or contain extraneous information are unacceptable (An F grade will be assigned.) You are expected to provide the statistical results from the computer using tables and graphs. Papers without empirical results are not completed papers.
I will not tolerate any disruption of class by beeping computers or ringing cell phones. Surfing the internet is to be on your own time not classroom time. You do not have to request my permission to visit the facilities during class. Please be as quiet as possible when leaving and entering the room. Please mute your computer during Zoom classes. Video is optional during class but required during office hours.
You will use the PMSP Student Package which you have a legal license to use upon purchase of the manual. You will have access to CRSP Dataset for stock prices from January 1926 to December 2019. By late February 2021, the CRSP database will be updated to December 2020. You will also have access to the Morningstar Equities (MarketBase), FRED, and Global Insight Economic Dataset. None of the data will have to be gathered and typed. You will not be required to do any programming in a computer language. The copying of any computer software or data from the databases is expressly prohibited. All of the computer resources used in this course are copyrighted material. Please respect these copyrights. The software for the CRSP access is available on the WRDS access site which can accessed from the Bartley network connections. The PMSP manual is available from the bookstore. The software can be used in any Microsoft Windows compatible computer that is running Windows XP, Windows 7 and Windows 10 Enterprise Edition or Professional Edition. Note that Home Editions will not work. It will work in Windows 8.1 but you should look for and download the Classic Windows screen for 8.1. There is a free download call DOSBox that will run PMSP in all Windows versions. You can also download DOSBox for the Apple OS X but PMSP is more difficult to run on an Apple MAC. You may not use the PMSP software unless you have purchased a manual at the bookstore.Disability Statement It is the policy of Villanova to make reasonable academic accommodations for qualified individuals with disabilities. If you are a person with a disability please contact me after class or during office hours and make arrangements to register with the Learning Support Office by contacting 610-519-5636 or at email@example.com as soon as possible. Registration with the Learning Support Office is required in order to receive accommodations.
During this period of diverse idealogical differences, this class is based on the idea that while markets are effective, they are not efficient. Any active investment process will not work in an purely efficient market. On the other hand, effective markets are very difficult to beat on average. The methodology in this class is based on Nobel Prize winning work in Modern Portfolio Theory by Harry Markowitz who was a student of Milton Friedman and both are from the very conservative classical school of economics. Professor Markowitz's modern portfolio theory will work in both efficient and effective markets. On April 1, 2020, Father President, in a letter to the university, responded to a Wall Street Journal opinion piece written by two Villanova faculty. In it, he made the following statement about Villanova's classroom policy:
"Our commitment to fostering a sense of belonging and inclusion for all students in no way means that we are rejecting or silencing certain viewpoints, nor does it mean we are downplaying our Catholic identity and values. As an academic institution, we want and encourage our faculty to challenge their students. We also believe it is important for faculty to teach and examine a wide variety of subjects, perspectives and viewpoints, i.e. some that students may agree with and others they may not."
This is a very difficult class because it integrates decision theory,
mathematical programming, statistics, history, social psychology with economic and investment theory.
It meets the standards of the Level 3 CFA exam. I hope you will abide by
Father Peter's classroom policy and we will have a good semester learning the
very difficult topic of portfolio management using modern portfolio theory.
I was an active portfolio manager in a $30 million investment fund for 13-14
years in the 1990s-2000s and I will be happy to provide you with my audited
returns for that period. We managed the fund using the techniques that are
used in this class. This class covers the top-down investment philosophy
that is consistent with Modern Portfolio Theory.
This is a very difficult class because it integrates decision theory, mathematical programming, statistics, history, social psychology with economic and investment theory. It meets the standards of the Level 3 CFA exam. I hope you will abide by Father Peter's classroom policy and we will have a good semester learning the very difficult topic of portfolio management using modern portfolio theory. I was an active portfolio manager in a $30 million investment fund for 13-14 years in the 1990s-2000s and I will be happy to provide you with my audited returns for that period. We managed the fund using the techniques that are used in this class. This class covers the top-down investment philosophy that is consistent with Modern Portfolio Theory.
The coin flip programs will only run in Windows Command Prompt. They will not run on a MAC. Unzip the file and place programs into a folder you create named c:\PMSP. If you need help, email me! Martingale coin flip programs - Martingale.zip Programs for Class
Mediasite Classroom Lecture Recordings are available here.
Outline for Second Term Paper
NOTE: The CRSP dataset is current to March 2022.
CRSP will be updated to December 2022 sometime in February 2023.
I. Set Investment Goals II. Stock Selection - Best in Industry - Use MBASE90 program MBASE. III. Portfolio Selection - January 1987 to December 1990. You could also us January 1985 or January 1986. IV. Evaluation of Portfolio Performance - January 1991 to December 1993. You could also use December 1994 or 1995 as an ending date.
Make sure every stock has data for complete period (1987-1993 for suggested period).
All Four Parts have to be completed for the paper to be considered a complete paper.
Outline for Third Term Paper
I. Macro Analysis Use a real dollar variable for the Federal Reserve monetary base by dividing it by the CPI. Use initial unemployment claims, nonfarm payroll, and fed funds rate as is. You should convert all data to percentage change data or graph the raw data using semi-log charts. Use the data from 1992 to 2020 to detect changes in the phases of the business cycle as per the classroom handout. For data through 2022, use Global Insight on WRDS Classic or use FRED for data into 2022.
II. Industry Analysis and Stock Selection
Pick 4 industries from each phase and the 2 or 3 best stocks from each industry. When you go to CRSP, you want to make sure that each stock has data available from January 1993 to December 2021. You want 20 stocks total, one from each industry. Download to disk. Use MBASE97 program EQUITY to select stocks.
The CRSP Lookup may say it has data to November 2020 or November 2021. The date was not updated but you will find that data are available to March 2022.
III.Use PMSP to generate an investment portfolio from an efficient frontier every 6 months starting in December 1996 and and your last portfolio will be generated in June 2021. You will need to change your historic period using the SETUP option in PMSP. Write down the stocks and allocations for each portfolio. Make sure that your 8-10 stocks are drawn from the industries that are appropriate for the current phase of the business cycle. Put allocations and stock returns into the EXCEL summary table discussed in class. You will purchase your first portfolio in January 1997 and your last portfolio in July 2021.
IV. Use the REVISE program to generate the performance results of a buy and hold strategy, a rebalance strategy for various periods, and a controlled revision strategy where you revise the portfolio every 6 months. Save the portfolio results to a disk file. Use the calendar provided below.
V. Input the portfolio returns into PMSP and evaluate the performance of strategies using Correl.Period Date Investment as of: 1-48 12/96 1/97 7-54 6/97 7/97 13-60 12/97 1/98 19-66 6/98 7/98 25-72 12/98 1/99 31-78 6/99 7/99 37-84 12/99 1/2000 43-90 6/2000 7/2000 49-96 12/2000 1/2001 55-102 6/2001 7/2001 61-108 12/2001 1/2002 67-114 6/2002 7/2002 73-120 12/2002 1/2003 79-126 6/2003 7/2003 85-132 12/2003 1/2004 91-138 6/2004 7/2004 97-144 12/2004 1/2005 103-150 6/2005 7/2005 109-156 12/2005 1/2006 115-162 6/2006 7/2006 121-168 12/2006 1/2007 127-174 6/2007 7/2007 133-180 12/2007 1/2008 139-186 6/2008 7/2008 145-192 12/2008 1/2009 151-198 6/2009 7/2009 157-204 12/2009 1/2010 163-210 6/2010 7/2010 169-216 12/2010 1/2011 175-222 6/2011 7/2011 181-228 12/2011 1/2012 187-234 6/2012 7/2012 193-240 12/2012 1/2013 199-246 6/2013 7/2013 205-252 12/2013 1/2014 211-258 6/2014 7/2014 217-264 12/2014 1/2015 223-270 6/2015 7/2015 229-276 12/2015 1/2016 235-282 6/2016 7/2016 241-288 12/2016 1/2017 247-294 6/2017 7/2017 253-300 12/2017 1/2018 259-306 6/2018 7/2018 265-312 12/2018 1/2019 271-318 6/2019 7/2019 277-324 12/2019 1/2020 283-330 6/2020 7/2020 289-336 12/2020 1/2021 295-342 6/2021 7/2021 348 months from January 1993 to December 2021.
All five parts have to be completed to be considered a complete paper.
CDO Investment Bankers
Download 1 (10.8mb) Citibase Excel SheetsDownload 2 ( 2.1mb) Marketbase December 1990 Download 3 ( 4.2mb) Marketbase March 1997 Portfolio.Zip ( 1.0mb) Programs for Class Style2010.Zip ( 1.0mb) Style Programs for Class Editor.Zip Data Editor for Class I. Introduction II. Saving for Retirement III. Importance of Parenting IV. Treat People Fairly V. Importance of Public Speaking VI. Partners VII. On Social Effectiveness