FBE 506 Quantitative Methods in Finance

Fall 2024

Course Description:

FBE 506 is a required course in the MS Finance program that aims to develop single and multi-variable mathematical and statistical models used in many practical problems of modern finance and economics.

Course Objectives:

Upon successfully completing this course, students will be able to:

1. Summarize sample data in descriptive statistics for making inference from sample to population using proper distribution theories.

2. Build simple economic and financial models, collect data and apply statistical methods for estimating the model, hypothesis testing, and forecasting.

3. Compute different measures of risk to investment and learn about their use in practice.

4. Combine several stocks into a portfolio and optimize the risk and return relation of the portfolio by minimizing the risk for an expected return or by maximizing return for an assumed risk tolerance.

5. Use statistical techniques to measure the effects of the changes in economic conditions or the effects of the special events on risk and return to securities and portfolios.

6. Do pricing of complex securities such as American and European options.

Course Materials:

I will be using chapters of my own manuscript. titled, Quantitative Methods in Finance Using R as the text book for the course.  The files will be posted under the Content tab of the course site on Brightspace. A recommended textbook for the course is, Quantitative Methods in Finance: Market Risk Analysis I, by Carol Alexander, John Wiley & Sons Ltd, 2010, ISBN: 978-0-470-99800. There is no perfect textbook that would systematically cover all the topics discussed in this course. Therefore, topics not covered by the textbook will be supplemented by the notes posted on Brightspace. For students who may need more detailed description of the statistical concepts, a recommended book is Statistics for Business and Economics, 12e, by Anderson, Sweeney and Williams, Cengage, ISBN: 978-1-133-27453-7. For a step by step application of statistics to data, I recommend https://www.statssolver.com/ an app that you can use in your computer or your cell phone. As well, you have to have access to one of the following statistical software to be able to complete the course assignments. These statistical software in order of user friendliness are, E-Views by Quantitative Micro Software; http://www.eviews.com, Stata; http://www.stata.com, or R; https://www.rstudio.com/products/. Although you may use any of the three statistical software for doing the course assignments, I will be using only R for the lectures and solutions to the assignments. You should make yourself familiar with R outputs.  Some of the questions in the tests will be based on R output. You are required to be sufficiently familiar with the topics assigned for each class meeting prior to the class so that they can intelligently be discussed and practiced in the class.

Grading Policy:

The course grade will be computed based on the following table:

        Points          % of Grade

HW assignments                                                              50                        10%

Course project and report                                                 100                       20%

Midterm 1                                                                       100                        20%

Midterm 2                                                                       100                        20%

Final Exam                                                                      150                        30%

Total              500                      100%

Course final grades will be determined using the following scale:

Final grades represent how you perform. in the class relative to other students.  The average grade for this class is expected to average about 3.5.  Three items are considered when assigning final grades:

1.    Your average weighted score as a percentage of the available points for all assignments (the points you receive divided by the number of points possible).

2.    The overall average percentage score within the class.

3.    Your ranking among all students in the class.

Class Participation and Contribution

Per USC grading policy, no portion of the grade may be awarded for class attendance, but non- attendance can be the basis for lowering a grade. To familiarize myself with your names, each class meeting, I will call the names of a few students randomly.  Students who receive two “no shows” during the random calls may lose 5% credit, unless they provide a legitimate excuse for missing the classes that can be documented and verified. Students can earn 10% credit for class participation and contribution by actively participating in class discussions, problem solving, discussing on-going current economic issues and else. Volunteering to solve an assignment in the class, providing the class with a reference to an interesting article or economic debate, or discussing the relevance of a certain economic subject studied in the class to their own work experience are examples of active class participation.

HW Assignments

There are  ten homework assignments posted under the Content tab of Brightspace.  You are responsible for solving and submitting only seven of the ten assignments on due dates. I highly advise you to review the other three assignments as well.  We will be solving some of those questions in the class. Completed homework assignments should be dropped in the Brightspace Dropbox on dates listed on the syllabus. No late HW will be graded. If you miss the HW deadline a score of zero will be assigned to HW. The test questions in the mid-term exams and the final exam will be similar to the homework assignments.  Therefore, I highly recommend that you work on the assignments and learn by doing. You my work with other students in a group or consult with other students in doing the HWs. However, copying other students’ work is absolutely forbidden. The solutions to HW assignments will be posted under the Content tab of the course site on Brightspace.

Midterm Exams

There will be two midterm exams. Each test will be worth 20% of the course grade and will test all the material covered up to the exam. If you miss the exam for any reason other than medical emergency, a score of zero will be assigned to the exam. If you miss the exam on account of a proven medical emergency a makeup exam should be arranged as soon as the medical emergency is over.

Final Exam

The final exam will be comprehensive but will emphasize the material covered after the midterm two. The final exam will be worth 30% of the course grade.   If you miss the final exam for a medical emergency reason that can be documented and verified, there will be a makeup final to be arranged as soon as possible.  Otherwise, a grade of zero will be assigned to the final exam.  All the exams in this course are closed notes and closed book.

Course Project and Report

You are required to work on one applied project. The project will concentrate on the application of the techniques taught during the semester to a portfolio that you will construct. Select five stocks from three different industries (for the list of the firms in different industries see, https://biz.yahoo.com/p/sum_conameu.html). Using Modern Portfolio Theory (MPT) and monthly adjusted closing prices of the stocks for three years, allocate a hypothetical amount ($100) on the selected securities. Apply the techniques learned in the class to your portfolio as the course proceeds. A detailed list of what is required in the course project is posted under the Content tab of the Brightspace. You are required to submit a one-page progress report on the dates listed on the Course Outline. The idea behind the course project is to apply the quantitative skills learned in this course to the portfolio index of your own construction. The project will be worth 100 points and will be graded as any test is graded. You have to show your knowledge of the subject matter as well as the skills in applying the quantitative methods in analyzing and explaining statistical results. You are required to submit your names and the list of the selected securities no later than the third week of the semester. An electronic copy of the completed project should be submitted to the Dropbox on the course site on Brightspace on due date listed on the course syllabus.

Open Expression and Respect for All

An important goal of the educational experience at USC Marshall is to be exposed to and discuss diverse, thought-  provoking, and sometimes controversial ideas that challenge one’s beliefs. In this course we will support the values articulated in the USC Marshall “Open Expression Statement.”

Class Etiquette

This is a large class and I need your cooperation in ensuring orderly conduct of the lectures.

•    Please arrive on time and turn your cellular phones off before entering the class.

•    You can bring your laptop to the class to take notes from the lectures or work on problems assigned as in- class practice.

•    Don’t have a conversation or chat with a classmate during the lectures.  Even a quiet chat can be distracting for other students.