Portfolio optimization Markowitz Method

To demonstrate  Markowitz Method we will assign some tasks and answer them step by step, morover you can find an excel file with formulas and all calculations at the bottom of this article.

Collect daily data for your stocks from https://quantquote.com/historical-stock-data Free Data tab.

Assignment 1. (5 points)

Collect data for last four years (ending in 2013). Identify risk free rate.

Calculate monthly returns for each of the stocks in the portfolio.

Calculate the mean monthly return for each stock.

ROE and Residual income analysis for a bank (Old line Bancshares, Inc.)

Bank Name: Old line Bancshares, Inc.

Question 1.

Table 1. Necessary information¹ to calculate decomposed ROE for Old line Bancshares bank

for last 3 years, as of and for the Year Ended December 31.

			2016			2015			2014
	Average assets		1584,939759			1324,556962			1182,166667
	Average stockholders’	148,9807475			138,7798408			130,146789
	equity
	Net income		13,16			10,46			7,09
	Sales*	68,721			58,298			51,56

Sales are taken as a sum of Interest income and other income, that is to say, total income *.

Other needed information is taken from Income statement and balance sheet of the bank and

the source is represented by a link on the bottom of the page.

Table 2. Components of decomposed ROE

American ultimatum to Russian economy

Close to the State Department, the CSIS research center issued a report on the prospects for Russian-American economic relations.

It is noted, in particular, that Russian investment in the US fell from $ 21.5 billion in 2013 to $ 8.3 billion in 2015, while US investment fell from $ 13.1 billion in 2013 to $ 2.95 billion in 2016, while taking into account the European divisions of American companies, this number of analysts is offered to be estimated at least three times more - for example, the study provides estimates of the American Chamber of Commerce, according to which the accumulated investments of 90 American companies in Russia by 2017 amounted to about $ 80 billion.

It is noteworthy that, in the framework of the still continuing export flow, primarily in the supply of crude oil from Russian brands (primarily Urals grade), US experts point to the continued interest of local refineries to work with such grades - in large part, that indicators of the so-called "crack spread" (that is, the difference between the cost of crude oil and refined products in the form of gasoline, diesel fuel, oils and other chemicals) for heavy types of oil equaled the cheaper Latin American varieties of oil. However, even price fluctuations in the North American market can only slow down but do not unfold the trend for the "shrinking" of direct Russian-American economic ties.

The fate of the ruble is decided by the barrel and the rating

During the week, the ruble was traded in a horizontal channel: the price for 1 US dollar fluctuated in the range of 64 - 66 rubles. Relative stability, reminiscent of the calm before the storm, is associated with the fastening of the barrel in the price range of $ 48-50 after the price rebound last week.

Unfortunately, the currency markets are still very modestly reacting to the improvement of the situation in the hydrocarbon market, preferring to play out the negative headlines with great enthusiasm, including the revision by the international rating agency S & P of the Russian rating to "non-investment" level. According to estimates by Moody's and Fitch, Russia is also at the last stage of the investment part of the rating scale, so that S & P may become the first agency that will lower the rating to "junk". Lowering the ratings can have a meaning?! This will put pressure on Russian Eurobonds and increase capital outflow from the country. Sanctions and the aggravated geopolitical situation in Ukraine continue to make the country unattractive for investments, and a downgrade could significantly exacerbate the situation.

At the opening of MICEX trading on Friday, January 23, the ruble appreciably strengthened to 62.9, however, while there is no longer any long-term trend. The International Energy Agency and OPEC are confident that in the near future oil production will be reduced in countries outside the cartel, which, instead of reducing the volume of supplies, on the contrary, increases production. This means that the growth of the barrel is temporary, and so the Russian ruble has nothing to catch. On the other hand, if the barrel of Brent drops again ?!?  $ 45, then the dollar will not keep you waiting and will rise above 65-66 rubles. It can be said that the markets are in anticipation of further movement of the barrel. Reducing the cost of oil, up to 40 dollars and below, waiting and rating agencies as a signal for a downgrade of Russia.

Revolutionary New Campaign to Change the Way the World Sees DairyIn the words of activist Erin Janus

 In the words of activist Erin Janus — dairy is scary. And while an increasing number of people are steering clear of cow’s milk, there’s still much work to be done. Myths and misinformation about the industry abound, with many consumers completely unaware of how dairy products are actually produced.

But a new campaign is looking to change public perception and raise awareness about the painful truth behind milk and cheese. Milk Hurts — and its offshoot, Mothers Against Dairy — has made its debut just in time for Mother’s Day.

“I founded the Mothers Against Dairy campaign as a way to directly counter the aggressive surge in pro-dairy messaging from female dairy farmers (many of them mothers) that I have encountered in my dairy research over the last several years,” says founder and activist Ashley Capps. “I believe this growing trend is no coincidence; rather, in this climate of increased criticism of dairy farming practices, it represents a strategic industry shift to put more female faces on dairy farming, and to reframe the industry as a maternal, nurturing one.”

Optimal use of an input in production process

Under adverse economic conditions, managers face the decision of whether to cease production of a product altogether, that is, whether to shut down. Although the choice may appear obvious (shut down if the product is generating monetary losses), a correct decision requires a careful weighing of relevant options. These alternatives differ depending on the firm’s time horizon. In the short run, many of the firm’s inputs are fixed. Suppose the firm is producing a single item that is incurring economic losses—total cost exceeds

revenues or, equivalently, the average total cost exceeds price. Figure displays the situation. At the firm’s current output, average cost exceeds price: AC>P*;

Thee firm is earning a negative economic profit. Should the firm cease production and shut down? The answer is no. To see this, write the firm’s profit as

           

Labor force as a source of economic growth

Sustained long-term economic growth comes from increases in worker productivity, which essentially means how well we do things. In other words, how efficient is your nation with its time and workers? Labor productivity is the value that each employed person creates per unit of his or her input. The easiest way to comprehend labor productivity is to imagine a Canadian worker who can make 10 loaves of bread in an hour versus a U.S. worker who in the same hour can make only two loaves of bread. In this fictional example, the Canadians are more productive. Being more productive essentially means you can do more in the same amount of time. This in turn frees up resources to be used elsewhere. What determines how productive workers are? The answer is pretty intuitive. The first determinant of labor productivity is human capital. Human capital is the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses. Typically the higher the average level of education in an economy, the higher the accumulated human capital and the higher the labor productivity. The second factor that determines labor productivity is technological change. Technological change is a combination of invention—advances in knowledge—and innovation, which is putting that advance to use in a new product or service. For example, the transistor was invented in 1947. It allowed us to miniaturize the footprint of electronic devices and use less power than the tube technology that came before it. Innovations since then have produced smaller and better transistors that that are ubiquitous in products as varied as smart-phones, computers, and escalators.

Adam Smith was a 18th-century philosopher renowned as the father of modern economics, and a major proponent of laissez-faire economic policies. In his first book, "The Theory of Moral Sentiments," Smith proposed the idea of the invisible hand—the tendency of free markets to regulate themselves by means of competition, supply and demand, and self-interest. Smith is also known for his theory of compensating wage differentials, meaning that dangerous or undesirable jobs tend to pay higher wages to attract workers to these positions, but he is most famous for his 1776 book: "An Inquiry into the Nature and Causes of the Wealth of Nations." Read on to learn about how this Scottish philosopher argued against mercantilism to become the father of modern free trade and the creator of the concept now known as GDP.

Early Life

The recorded history of Smith's life begins on June 5, 1723, at his baptism in Scotland; however, his exact birthdate is undocumented. Smith attended the University of Glasgow at age 14, later attending the prestigious Balliol College at Oxford University. He spent years teaching and tutoring, publishing some of his lectures in his 1759 book, "The Theory of Moral Sentiments." The material was well-received and laid the foundation for the publication of "An Inquiry Into the Nature and Causes of the Wealth of Nations," (1776), which would ultimately cement his place in history.

The Theory of Moral Sentiments

Smith is most famous for his 1776-piece, "The Wealth of Nations," but his first major treatise, "The Theory of Moral Sentiments," released in 1759 created many ideas still practiced today.

Some may be surprised to learn that in this book, Smith, notoriously known as the “Father of Capitalism,” discusses charity and human ethics extensively in this first book. While much of the philosophy behind Smith's work is based on self-interest and maximizing return, "The Theory of Moral Sentiments," was a treatise about how human communication relies on sympathy. The book extensively explored ideas such as morality and human sympathy. In the book, Smith argued that people are self-interested but naturally like to help others.

SIX STEPS TO DECISION MAKING

Every business and government are making decisions on a daily basis.   These decisions are affecting customers, employees, environment and all society. So, to make appropriate decisions they commonly use some framework. Now I want to show you six steps in decision-making which are fundamental for that frameworks.

Step 1: Define the Problem

What is the problem the manager faces? Who is the decision, maker? What is the decision setting or context, and how does it influence managerial objectives or options?

Decisions do not occur in a vacuum. Many come about as part of the firm’s planning process. Others are prompted by new opportunities or new problems. It is natural to ask, what brought about the need for the decision? What is the decision all about? In each of the examples given earlier, the decision problem is stated and is reasonably well defined. In practice, however, managerial decisions do not come so neatly packaged; rather, they are messy and poorly defined. Thus, problem definition is a prerequisite for problem management.

Step 2: Determine the Objective

What is the decision maker’s goal? How should the decision maker value outcomes with respect to this goal? What if he or she is pursuing multiple, conflicting objectives? When it comes to economic decisions, it is a truism that “you can’t always get what you want.”2 But to make any progress at all in your choice, you have to know what you want. In most private-sector decisions, profit is the principal objective of the firm and the usual barometer of its performance. Thus, among alternative courses of action, the manager will select the one that will maximize the profit of the firm. Attainment of maximum profit worldwide is the natural objective of the multinational carmaker, the drug company, and the management and shareholders of Barnes & Noble, Borders Group, BP,

NBC, and CBS. The objective in a public-sector decision, whether it be building a bridge

or regulating a utility, is broader than the private-sector profit standard. The government decision maker should weigh all benefits and costs, not solely revenues and expenses.

Step 3: Explore the Alternatives

What Economics Is and Why It's Important

Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions,family decisions, business decisions or societal decisions. If you look around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants for goods, services and resources exceed what is available. Resources,such as labor, tools, land, and raw materials are necessary to produce the goods and services we want but they exist in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has just 24 hours in the day

to try to acquire the goods they want. At any point in time, there is only a finite amount of resources available.

Think about it this way: In 2015 the labor force in the United States contained over 158.6 million workers, according to the U.S. Bureau of Labor Statistics. Similarly, the total area of the United States is 3,794,101 square miles. These are large numbers for such crucial resources, however, they are limited. Because these resources are limited, so are the numbers of goods and services we produce with them. Combine this with the fact that human wants seem to be virtually infinite, and you can see why scarcity is a problem.

If you still do not believe that scarcity is a problem, consider the following: Does everyone need food to eat? Does everyone need a decent place to live? Does everyone have access to healthcare? In every country in the world, there are people who are hungry, homeless , and in need of healthcare, just to focus on a few critical goods and services. Why is this the case? It is because of scarcity.

John Maynard Keynes

John Maynard Keynes

John Maynard Keynes, 1st Baron Keynes CB FBA ( 5 June 1883 – 21 April 1946), was a British economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles and is widely considered to be one of the most influential economists of the 20th century and the founder of modern macroeconomics. His ideas are the basis for the school of thought known as Keynesian economics and its various offshoots.

In the 1930s, Keynes spearheaded a revolution in economic thinking, challenging the ideas of neoclassical economics that held that free markets would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands.

THE GLOBAL ECONOMIC CRISIS continued

Like the Andromeda strain, the subprime meltdown went viral, and it ended up infecting almost all aspects of the economy. Financial institutions were the first to fall. Many originating firms had not sold all of their subprime mortgages, and they failed. For example, New Century declared bankruptcy in 2007, IndyMac was placed 

under FDIC control in 2008, and Countrywide was acquired by Bank of America in 2008 to avoid bankruptcy.

THE GLOBAL ECONOMIC CRISIS

Although the global economic crisis has many causes, mortgage securitization in the 2000s is certainly one culprit, so we begin with it. 

The Globalization of Mortgage Market Securitization:

 A national TV program ran a documentary on the travails of Norwegian retirees resulting from defaults on Florida mortgages. Your first reaction might be to wonder how Norwegian retirees became financially involved with risky Florida mortgages.

We will break the answer to that question into two parts. First, we will identify the different links in the financial chain between the retirees and mortgagees.

Optimization Problems

One of the most important applications of the derivative concept is to “optimization” problems, in which some quantity must be maximized or minimized. Examples of such problems abound in many areas of life. An airline must decide how many daily flights to schedule between two cities to maximize its profits. A doctor wants to find the minimum amount of a drug that will produce the desired response in one of her patients. A manufacturer needs to determine how often to replace certain equipment to minimize maintenance and replacement costs.

Our purpose in this section is to illustrate how calculus can be used to solve optimization problems. In each example, we will find or construct a function that provides a mathematical model for the problem. Then, by sketching the graph of this function, we will be able to determine the answer to the original optimization problem

by locating the highest or lowest point on the graph. The y-coordinate of this point will be the maximum value or minimum value of the function.

The example is very simple because the functions to be studied are given explicitly.

Example: 

Impact of a vegan agricultural system on the economy

This report forms part of the "Moving to a vegan agricultural system" series which examines how a move to an agricultural system where no animals are used would impact sectors such as the economy, employment, land use, the environment and food security. This part outlines impacts on the Australian economy. It will attempt to answer the following questions.

• How much do current animal industries contribute to the economy, including exports?
• What would be the contribution to the economy of alternative industries?
• How many people are currently employed in animal industries?
• How are these jobs distributed amongst industries, such as farming, sale yards, slaughterhouses and processing, distribution, retail, etc?
• What is the geographical distribution of employment in animal industries?
• What would be the geographical distribution of employment in alternative industries?
• What population movements would a move to alternative industries entail?
• What would be the impact on housing and regional towns by a move to alternative industries?
• As the demand for meat, dairy and eggs reduces, what new jobs would be created in the expanding plant farming sector and in the new vegan food industries?
• What programs can be put in place to help animal farmers transition to plant-based farming?

While this report concentrates on the impacts of a vegan agricultural system, in this section we will assume that animal products are no longer imported into Australia. This is relevant in an economic analysis as Australia is a net importer of some animal products, such as fish and pig meat.