IE444 Operations Research in Finance

Instructor: M. C. Pinar
Room: 305
Office Hours: Wednesdays 15:30-17:15
Textbook and Reference Material:

Optimization in Finance (will be made available to the students) by Reha Tutuncu
Optimization Methods in Finance (will be made available to the students) by Gerard Cornuejols
Investment Science, by D.G. Luenberger, Oxford University Press, 1998 (recommended only)

Topics: A more detailed syllabus in pdf format is here.

Homework 4: Due, April 5, 2004. Download the MS EXCEL file data.xls here. The file contains monthly historical
returns between January 1986 and December 1995 for 29 of the 30 companies listed in the Dow-Jones Index.
Use the Excel data analysis tool to compute the mean vector and covariance matrix for the data. Then
1. Compute and plot the MV efficient frontier using the XPRESS-MP solver in MOSEL and any graphics program
    of your choice.
2. Assume there is also a risk free asset with annual return R=0.33 percent (this is the average annual return
    on US T-Bills between 1950 and 1969 multiplied by 1/12). How does the composition of the efficient portfolios
    change? Report your observations along with a discussion.
3. Assume you currently own the following portfolio: x0(i)=0.20 for i=1,...,5 and x0(i) =0 for i=6,...,29. Reoptimize the
    portfolio (without using the riskless asset) considereing transaction costs for buying and selling. Solve for a fixed level
    of expected return and three different transaction costs (0.2 %, 0.5 % and 2 %). Comment on your results.

      Homework 5: Due, April 29, 2004.
           1. Using the MS EXCEL file data.xls of HW 4, compute a minimum CVaR portfolio at 95 %. Assume all historical
              returns (mu) equally likely in approximating the CVaR. The set of feasible portfolios is described by the following constraints:
            0 <= x(i) <= 0.1 for all i, e' x =1, sum(i,x(i)*mu(i)) >= mutarget, where mutarget=5 %. Remember that you have to use LP.
         2. Assume you currently own the following portfolio: x0(i)=0.20 for i=1,...,5 and x0(i) =0 for i=6,...,29. Reoptimize the
        portfolio considering transaction costs for buying and selling. Solve for three different transaction costs (0.2 %, 0.5 % and 1 %).

Midterm Examination: April 7, 2004, 13:40--15:30.
Final Examination: May 24, 2004, Monday, 12:15--15:30 BZ--08.

Grading

Homeworks: 20 %

Midterm examination: 30 %

Final: 50 %

Participation: 0 %

Homeworks:	20 %
Midterm examination:	30 %
Final:	50 %
Participation:	0 %