Book Image

Python for Finance - Second Edition

By : Yuxing Yan
5 (1)
Book Image

Python for Finance - Second Edition

5 (1)
By: Yuxing Yan

Overview of this book

This book uses Python as its computational tool. Since Python is free, any school or organization can download and use it. This book is organized according to various finance subjects. In other words, the first edition focuses more on Python, while the second edition is truly trying to apply Python to finance. The book starts by explaining topics exclusively related to Python. Then we deal with critical parts of Python, explaining concepts such as time value of money stock and bond evaluations, capital asset pricing model, multi-factor models, time series analysis, portfolio theory, options and futures. This book will help us to learn or review the basics of quantitative finance and apply Python to solve various problems, such as estimating IBM’s market risk, running a Fama-French 3-factor, 5-factor, or Fama-French-Carhart 4 factor model, estimating the VaR of a 5-stock portfolio, estimating the optimal portfolio, and constructing the efficient frontier for a 20-stock portfolio with real-world stock, and with Monte Carlo Simulation. Later, we will also learn how to replicate the famous Black-Scholes-Merton option model and how to price exotic options such as the average price call option.
Table of Contents (23 chapters)
Python for Finance Second Edition
Credits
About the Author
About the Reviewers
www.PacktPub.com
Customer Feedback
Preface
Index

A 2-stock portfolio


Clearly, a 2-stock portfolio is the simplest one. Let's assume that the weights of those two stocks are w1 and w2. The portfolio returns are given here:

Here, Rp,t, is the portfolio return at time t, w1 (w2) is the weight for stock 1 (2), and R1,t (R2,t) is return at time t for stock 1 (2). When talking about expected return or mean, we have a quite similar formula:

Here, is the mean or expected portfolio returns and is the mean or expected returns for stock 1 (2). The variance of such a 2-stock portfolio is given here:

Here, is the portfolio variance and is the standard deviation for stock 1 (2). The definitions of variance and standard for stock 1 are shown here:

is the covariance (correlation) between stocks 1 and 2. They are defined here:

For covariance, if it is positive, then those two stocks usually would move together. On the other hand, if it is negative, they would move in the opposite way most of times. If the covariance is zero, then they are not related...