Open Yale Lecture 4

Portfolio Diversification and 

Supporting Financial Institutions

http://www.youtube.com/watch?v=efPKwxZuLKY&list=PL8F7E2591EE283A2E&index=4&feature=plpp_video 

CLASS NOTES: 

Portfolio can help hardship

Part of risk management

Math:

Capital asset and pricing model

Correction of assets = portfolio (à portfolio management)

Return vs. variance

n independent assets

Sigma = Std dev of return

r = expected return

Square root rule

Sigma_portfolio = sigma/square(n)

Equally Weighted

r_portfolio = r

Two Asset Case: n = 2 not independent

Asset1 r1= E(return1) Sigma1 = Std dev(return1)

Asset 2 r2 = E(return2) Sigma2 = Std dev(return2)

Cov(r1, r2) = Sigma12

X1 = in asset 1

1-X1 in asset 2

X2= 1-X1

Portfolio Exp return

r = SUM(xiri) = x1rx + x2r2 = x1r1+(1-x1)r2

x1 = (r-r2)/(r1-r2) 

Riskless asset

Sigma_f = 0: straight line

Tangency portfolio

The tangency portfolio combines the optimal combination of risky assets with a risk-free asset.

Mutual fund theorem

Capital asset pricing model

CAPm

Tobin, Sharpe, Lintner, Markowls

Assume everyone is rational, holds tangency portfolio.

Tangency portfolio = Actual market portfolio

r1=rf + Bi*(rm-rf)

rm: expected ret on market portfolio

SUMMARY:

Financial modeling has been researched and invented for part of risk management. The result from these equations can be useful information for decision making of investors whether they should invest. Efficient frontier (Harry Markowitz and others) which is a concept in modern portfolio theory has been explained mainly. The figure of Standard [Deviation vs Expected Returns] is explained. Top straight line of the hyperbola is called “efficient Frontier” and it has optimum returns for the investment under the given set of risks.

Open Yale Lecture 3

Technology and Invention in Finance

http://www.youtube.com/watch?v=1nVRW8o7J0w&list=PL8F7E2591EE283A2E&index=3&feature=plpp_video

CLASS NOTES:

History of finance is copies of various invention (in the world) to manage long term risk

Need Invention

Long term risk theme (for risk management)

Backus Kchoe

(Perfect) Correlation of Consumption -> elimination of risk

Socialism – R. Owen

Moral hazard problem

(Complete) Sharing, risk sharing, equality  

Karl Marcus

ð  Public finance

Tax and welfare system (government) è Worked (Invention)

History of Taxes

Income Tax during civil war, progressive tax  (Invention)

Insurance (good invention)

Framing issue: Money Frame, money terms

Real Frame – Index to price

IT à economic dislocation and opportunities

Insurance Policy as invention, must exclude hazard cases to make it works

Develop statistics

Topics: Wheel, Patent (examples of innovation)

19C IT innovation for financial opportunity

Paper (mass-production) è record keeping

Carbon paper, typewriter, standardized forms, civil service, firms, postal service

Social security (Germany) over 100 years old

SUMMARY:

Historically human has been trying to find a way for (financial) risk management. The process went through trial-and-error. Ones very success are considered innovations which are for instance, tax and welfare, income tax, insurance, money framing, and social security. The financial system development were also closely related and depending on IT development in the era. (i.e. Paper->Carbon paper->Printing technology->Postal service-> etc. etc. -> Computers/Database so on)

Open Yale Lecture 2

The Universal Principle of Risk Management: Pooling and the Hedging of Risks

LINK

http://www.youtube.com/watch?v=WMkD8HKJQCM&list=PL8F7E2591EE283A2E&index=2&feature=plpp_video

SUMMARY


It is interesting that the concept of probability and statistic were appeared relatively late in the history, after 17 century. Today's class reviewed all principals in mathematics aspect. 1) Independent theory 2) Multiplication theory 3) Sampling/Geometric average 4) variance/co-variance 5) Gaussian distribution 6) PV


NOTES

1.     Historical introduction

Probability

1600 <

17 century

Probable …  trust worthy ness , in Shakespeare

Probability theory / sampling theory - Nala M.

Life table – insurance – ancient Rome

In Renaissance Italy – insurance policy started

Slow start of insurance in history  – due to no lack of probability concept, no clear meaning

Luck / Risk – the theory is away from this.

2.    Principals

P: Prob  0<= P <= 1  (basic)

·         Independent Theory

Independence  (Independent Event) 

·         Multiplication rule

P(A & B) = P(A) * P(B)

i.e. Fire in London

No risk of whole city burn down for insurance company

·         Binominal Distributor

F(x) = P^x (1-P) ^(n-x) n!/(n-x) !

# of accidents

·         Expected Value, Mean, Average

x : Random Variable

Population  E(x) = Myu x = (Sum i= 1-infinit) P(x-xi)xi

Average Sum(i=1-n) xi/n  

·         Sampling Ave.

·         G(x) = Geometric average  : multiply  all and ^1/n  -- Finance use to expect returns

  - lower number then E(x)

Experiment

E(x) = Myu x = Integral –infinit to + infinit f(x)x dx

Variance Sigma S^2 Standard Deviation

·         Population Variance Var(x) = Sum P(x-xi_(xi-u)^2

S(x)^2 = Sum (x-xbar)^2/n – Sample variance

·         Covariance (2 random variables)

C(x,y) = Sum (xi -xbar)(yi -ybar)/n

Negative / positive

Move differently / move together

Correlation

Corr -1 ~ <= P <= +1

P=Cov(x,y)/SxSy

·         Regression – Gauss

Y=Return on A Inc.

X= Return on MKT

Regression line

Alpha (Y(X0))  & Beta (slope)

A’s Performance  in the market

·         Normal Distribution – Gaussian distribution

Bell Shape Curve

Fat Tailed distribution = lots of returns

(+) Right tail / (-) Left tail

·         Present Values PV

·         Console or Perpetuity

• Annuity
• Utility function 

Bus595 Open Yale Lecture 1

Open Yale 1st Lecture by Professor Shiller

http://oyc.yale.edu/economics/econ-252-11/lecture-1

Introduction to the course

SUMMARY:

What is the purpose of finance? In general, people tend to think it is about how to make money. In a certain extent it is true. Professor Shiller repeatedly emphasized that it is not only making money but the technique/technology/method to make things happen in large scale, has power to change the world in better way. 


What are the elements of good finance people? They know how to make the things happen, have effects to the society, have a sense of philanthropy, and at last, are hard-working. These are the gifted talents not many people have.

My understanding is that finance is to keep the world and life normal, has power to make big things happen. However we must watch out “business without ethics”

NOTES:

• Basic / Undergraduate can take
• Market = Real world, practical, society, more general than trading
• Financial Market = structure, large scale, resource allocation, ventures, returns, managing risk
• Details: how thing work, make things happen (large scale), banking insurance securities, crisis, future
• US / World
• Open-Yale free class 2008/2011
• Need Mathematics but minimum
• Self-contained
• 6 TAs for this course (not for open Yale)
• Purpose: Do things to the world.  Finance = Fundamental of the sciety.  Not making money.  Technology to do things. Engineering. Social science aspects. 
• About textbooks
• Career oriented
• Finance among occupations
• Importance of Financial technique
• Forbs 400 richest people = … ‘0’ business
• Finance == Making things happen. Getting capital mass scale
• i.e. Andrew Carnegie == steel company, essay, 55+, business (make things happen)
• Elements of good business/finance people:  Practical  Hard working  Gifted
• Outlines for all lectures 

About bus 595 Special Topic: finantial market

Why I am taking this class and what I expect


Unlike other courses, this CALMAT course is utilizing one of the online courses so called Open Course Wave by Yale University. This will be a new case study for CALMAT in this semester. As I glanced the site briefly, they are many kinds of lectures in different fields of study in Yale Univ. I did not know that such courses can be taken by free in the internet.  CALMAT is really up-to-date in finding good things as the educator. The main reason I am taking this course is that it has been reviewed and  recommended by the CALMAT professor especially for MBA level students. The course must have a lot of  useful information to study. Also we will have the ULearn online forum so I would expect the study will have a certain degree of interaction among students then stimulating my mind regarding the topics. (-- not real time, but it is OK)

Open Course Wave – Yale University

http://oyc.yale.edu/courses

Course #: ECON 252 (2011)  

There are many other courses I might be interested anyway.

Android App Demo - My Grand -

Introduction 

•Learn how to allocate 2D graphic on the screen

•Learn how to integrate activities with Key stroke

•Learn how to integrate audio files to application

•Class name: MyGrand  inherits Activity

è Access to key pad, audio methods (utilities)

•Class name: KeyView inherits View

è allows access to all 2D methods

User Interface 

Key Definitions and 2D Interface

• MyGround-Activity OnKeyDown() method  is the handler
• When a Key pad (A-H) is pressed, it shades the location of the key in 2D.
• Piano Keys     Middle C-High C are mapped to: C,D,E,F,G,A,B,H

Audio Interface 

MyGround-Activity OnKeyDown() method  is the handler

When a Key pad (A-H) is pressed, it makes the sound of selection.

Successfully tested with the following format

•MP3

•MP4

•WAV (Windows XP)

Does not compatible with

•WMA(Windows7)

Need Recoding Software

•Sound Recorder (Windows accessories)

Future Enhancement Ideas

•Play list

Browse files on the handset

Upload the file on App

Register in play list and play

•Key extension

Support 67 keys

•Display music notes

(Chapter 15) International Strategies ~ The last chapter ~

Review 5 Values 

1. Access to new customers
2. Low cost of production
3. Develop new core competency
4. Leaning current core competency
5. Managing corporate risk

Review Risks

• Corporate risk

          - Liabilities and dangers - get more funding to take risk. What happen if revenue is not increasing?

• Financial risk

         - Exchange rate risk

• Country risk

         All local risks such as:
         - Local government
         - Natural disasters

MEMO:

- The country risk is a portrait of the economic and financial situation of a certain country, also showing the political stability and the historic performance in fulfilling its financial obligations.

- The two relevant risks for the Central Bank to set the level of the interest rate in an open economy are the currency and country risks.