FINC 3330 Quant Project
Seungho Baek
Due: Sunday, Aug. 16, 2020, 11:59 P.M.
Consolidate all excel spreadsheets from part1 in a single Excel file. Please make a cover page (name and
ID) in Sheet1 in your EXCEL file. To submit this project electronically, use Blackboard. DO NOT send me
it via email. Please submit your project in a single EXCEL file. ONLY an EXCEL FILE will be accepted.
You have write up with your own words. Do not copy from others’ work. In the last page, you have to show
all your references for your project in the last sheet in your Excel.
Part 1 Analysis of Economic Indicators
Instruction: You have been retained by the SHB investment group to provide a fundamental analysis
eport to the president of the company, Seungho Baek. You are asked to examine the value of economic
indicators as below.
1. TED spread: The TED spread is an indicator of perceived credit risk in the general economy. An
increase in the TED spread is a sign that lenders believe the risk of default on inte
ank loans (also
known as counterparty risk) is increasing.
2. Credit spread: A credit spread is the difference in yield between a U.S. T- bond and a debt security
with the same maturity but of lesser quality. Widening credit spreads indicate growing concern about
the ability of corporate (and other private) bo
owers to service their debt while na
owing credit
spreads indicate improving private creditworthiness.
3. Term spread: Term spreads, also known as interest rate spreads, represent the difference between the
long-term interest rates and short-term interest rates on debt instruments such as bonds Widening
term spreads indicate boom economy in the future whereas na
owing credit spreads indicate economic
ecession in the future.
4. Term Structure of Yields: The term structure of interest rates is the relationship between interest rates
or bond yields and different terms or maturities. When graphed, the term structure of interest rates
is known as a yield curve, and it plays a central role in an economy. 1
5. Cumulative returns of S&P market index: A cumulative return is the aggregate amount an investment
has gained or lost over time, independent of the period of time involved. Upward trend of cumulative
eturns generally indicates bull stock market while downward trend indicates bear market.
In order to generate these economic indicators, you need to use two data resources to collect economic
variables such as Federal Reserve Economic Data (FRED) 2 and Yahoo! Finance. The interest rates necessary
for computing spreads is located in FRED. You are able to obtain the historical stock index prices from Yahoo!
Finance. To locate the historical s&p 500 index price, please follow the below steps.
• Enter ˆGSPC in the search bar for Quote “Lookup”.
1Note that the term structure reflects expectations of market participants about future changes in interest rates and thei
assessment of monetary policy conditions. The yield curve represents the changes in interests rates associated with a particula
security based on length of time until maturity. Unlike other metrics, the yield curve is not produced by a single entity o
government. Instead, it is set by measuring the feel of the market at the time, often refe
ing to investor knowledge to help
create the baseline. The direction of the yield curve is considered a solid indicator regarding the cu
ent direction of an economy.
2https:
fred.stlouisfed.org
1
• Click Historical Data tab.
• Set “Time Period” Jan XXXXXXXXXXDec. 2019.
• Set “Frequency Monthly”.
• Click Apply and click Download.
You must write a report including your findings, all relevant information and computations, and provide
evidence. For this project, you must download monthly historical data from Jan. 2001 to Dec. 2019.
Problem 1. Investigate important economic risk events since the year of 2000 and summarize them.
Problem 2. TED spread is defined as the difference between 3 month LIBOR (loan) rate - 3 month T-bill
ate.3 Compute monthly TED spreads from Jan. 2000 to Dec. 2019 and plot the TED spreads
over time.
Problem 3. Let us define a credit spread as the difference between US coporate bond yields and 10 yea
Treasury rate. For this exercise, use Bank of America Me
ill Lynch US Corporate AAA
Effective Yield as a corporate bond rate and 10-Year Treasury Constant Maturity Rate as
Treasury rate.4 Compute monthly credit spreads from Jan. 2000 to Dec. 2019 and plot the
credit spreads.
Problem 4. In practice, a term spread is defined as 10 year Treasury rate minus 1 year Treasury rate.5
Calculate monthly term spreads from Jan. 2000 to Dec. 2019 and plot the term spreads.
Problem 5. Examine time series plots from problem 2, 3, and 4 and suggest your findings. Suggest you
findings on how these indicators responded against systemic shocks that you answered in
problem 1.
Problem 6. Examine yield curve shapes using daily yield curve rates provided by U.S. department of
treasury6.
a) Report treasure yield rates (1 month, 3 month, 6 month, 1 year, 2 year, 3 year, 5 year, 7
year, 10 year, 20 year, 30 year) on Jan. 02, 2014, Jan. 02, 2015, Jan. 04, 2016, Jan. 03,
2017, Jan. 02, 2018, Jan. 02, 2019, and Jan. 02, 2020.
) Compute each term spreads for seven term structures.
c) Plot seven yield curves that show the relation between yields and maturities.
d) Provide your findings thoroughly from b) and c).
Problem 7. Compute monthly S&P 500 index returns. To calculate monthly returns using S&500 index
price, you need to use formula as Rt =
Pt−Pt−1
Pt−1
where t represents time (In our case, t refers to
month; Pt represents the S&P index price at time t. For example, if you would like to compute
a return on Feb., 2000, you may be able to specify an equation as RFeb,2000 =
PFeb,2000−PJan,2000
PJan,2000
Problem 8. Using monthly returns that you obtained from the previous problem, compute monthly cu-
mulative returns. To compute monthly cumulative returns, use the formula as CRt = Rt +∑T
j=1Rt−j where CRt represents a cumulative return at time t.
Problem 9. Plot monthly cumulative returns and examine how cumulative return series are affected by
economic crisis. Also indicate bear or bull stages in the US stock market since the year of
2000.
3TED spread =3 month loan rate - 3 month T-bill rate
4BofA Me
ill Lynch US Corporate AAA Effective Yield - 10-Year Treasury Constant Maturity Rate
510-Year Treasury Constant Maturity Rate - 1-Year Treasury Constant Maturity Rate
6https:
www.treasury.gov
esource-cente
data-chart-cente
interest-rates/pages/textview.aspx?data=yield
2
Part 2 Portfolio Return and Risk
Instruction: You are a portfolio investment analyst at Goldman Sachs. Your investment unit manages two
equity portfolios - one portfolio, named P1, consists of two stock assets (Apple (AAPL) and Microsoft(Ticker:
MSFT)) and the other portfolio, named P2, consists of five stocks (Disney(Ticker:DIS), Boeing(Ticker:BA),
Amazon(Ticker:AMZN), Tesla(Ticker:TSLA), Netflix (Ticker:NFLX)). Now you are asked to compute two
portfolio returns and risk measures. To do this, first download monthly stock prices from Dec.2009 to Dec.
2019 from Yahoo! Finance and compute monthly stock returns from Jan.2010 to Dec XXXXXXXXXX
Problem 1. Compute the respective average, standard deviation, and covariance of monthly stock returns.8
Problem 2. Make two covariance matrices using two portfolio components. Note that you have to make a
completed form of a matrix as below.9
ΣP1 =
(
σ2AAPL = σAAPL,AAPL σAAPL,MSFT = σMSFT,AAPL
σMSFT,AAPL = σAAPL,MSFT σ
2
MSFT = σMSFT,MSFT
)
(1)
ΣP2 =
σ2DIS σDIS,BA σDIS,AMZN σDIS,TLSA σDIS,NFLX
σBA,DIS σ
2
BA σBA,AMZN σBA,TLSA σBA,NFLX
σAMZN,DIS σAMZN,BA σ
2
AMZN σAMZN,TLSA σAMZN,NFLX
σ2TLSA,DIS σTLSA,BA σTLSA,AMZN σ
2
TLSA σTLSA,,NFLX
σ2NFLX,DIS σNFLX,BA σNFLX,AMZN σNFLX,TLSA σ
2
NFLX
(2)
Problem 3. Using the obtained statistics from problem 1, calculate an equal weighted portfolio return and
portfolio variance for the first portfolio using the below equations.
E(RP1) = wAAPLr̄AAPL + wMSFT r̄MSFT (3)
σ2P1 = w
2
AAPLσ
2
AAPL + w
2
MSFTσ
2
MSFT + 2wAAPLwMSFTσAAPL,MSFT (4)
Problem 4. Using the obtained statistics from problem 1, calculate an equal weighted portfolio return and
portfolio variance for the second portfolio using the below equations.
E(RP2) = wDIS r̄DIS + wBAr̄BA + wAMZN r̄AMZN (5)
+ wTLSAr̄TLSA + wNFLX r̄NFLX
σ2P2 = w
2
DISσ
2
DIS + w
2
BAσ
2
BA + w
2
AMZNσ
2
AMZN + w
2
TLSAσ
2
TLSA + w
2
NFLXσ
2
NFLX (6)
+ 2wDISwBAσDIS,BA + 2wDISwAMZNσDIS,AMZN + 2wDISwTLSAσDIS,TLSA
+ 2wDISwNFLXσDIS,NFLX + 2wBAwAMZNσBA,AMZN + 2wBAwTLSAσBA,TLSA
+ 2wBAwNFLXσBA,NFLX + 2wAMZNwTLSAσAMZN,TLSA + 2wAMZNwNFLXσAMZN,NFLX
+ 2wTLSAwNFLXσTLSA,NFLX
7Rt =
Pt−Pt−1
Pt−1
where Rt represents a stock return at time t, Pt is a stock price at time t.
8Use STDEV.P in Excel, not STDEV.S. Note that the formula for standard deviation based a sample is given by σ2Sample =∑N
i=1
(X−X̄)2
N−1 , while the formula for standard deviation based on a population is written as σ
2
Population =
∑N
i=1
(X−X̄)2
N
.
9Use Data Analysis Toolpak to compute a covariance matrix.
3
Problem 5. Using a matrix multiplication (i.e. MMULT in Excel.), compute two portfolio returns and
portfolio variances.10
E(RP ) = w · rT (7)
σ2P = w · Σ · wT (8)
Problem 6. With the first portfolio, create a table that shows the benefit of diversification using Data
Table in Excel. (Note that the table shows portfolio returns and portfolio standard deviation
with respect to scenarios of weights on AAPL.)
Problem 7. Using the table obtained from problem 6, Plot expected returns against portfolio risk (standard
deviations) displaying efficient portfolios.
Problem 8. Compute 99%-VaR and ES for the first and second portfolio components and explain these
values.
V aR(99%) = E(RP ) − Z99%σP = E(RP ) − Φ−1(99%)σP (9)
ES(99%) = E(RP ) − σP
φ(Φ−1(1 − 0.99)
1 − 0.99
(10)
where φ(·) is the normal density function, Φ−1(·) is the inverse cumulative normal density
function.
Note for Excel:
• To compute Z99% (i.e.Φ−1(0.99) ), use NORM.S.INV (0.99)
• To compute φ(Φ
−1(1−0.99)
1−0.99 , use NORM.S.DIST(NORM.S.INV (0.01),FALSE)/0.01
10Let w be a weight matrix that has N elements, w = (w1, w2, ...., wn), and let r be a return matrix with N elements,
= (r1, r2, ...., rn). Let Σ be a N by N covariance matrix, Σ =
σ1,1 σ1,2