Finance 2324 -- Portfolio Management

Dr. David Nawrocki


Villanova School of Business

Department of Finance

Fall 2022

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:




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.

Course Description

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 student’s 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 Policy

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 right to 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

2. Portfolio Management



AI Model based on Ashby's Design for a Brain

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.

Late Policy

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.

Honor Statement

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 instructor’s 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 Dean’s office and recorded in the student’s 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 student’s official transcript.

Paper Format

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.

Other Issues

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.

Computer Programs

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 as soon as possible. Registration with the Learning Support Office is required in order to receive accommodations.

                                                                                                  Idealogical Differences

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.

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 -    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 Sheets

Download 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