FIN 735: Financial Modeling

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FIN 735 Financial Modeling

• Lawrence P. Schrenk.
• Instructor

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• Financial Basics

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Overview

• Returns
• Holding Period Return
• Annualizing Returns
• Continuous-Time Returns
• Data Sources
• Fred
• EDGAR
• Money Central

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Financial Data

• Financial Data can be ambiguous. It can be
  presented
• As a dollar value or a return
• a return of five percent can be written as
  either 0.05 or just 5.
• In annual, monthly, daily, etc. form
• form new-to-old or old-to-new

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Holding Period Return

• The holding period return is the return over some
  period of time.
• We calculate it from prices or levels

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Holding Period Return (contd)

• Stock A sells for 46.99 in January and 48.51 in
  February.
• But note this is the monthly return!

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Holding Period Return (contd)

• But this is not very useful if we are comparing
  assets with different holding periods.
• How do you easily tell whether a quarterly or
  monthly return is better?

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Annualizing Returns

• Returns are typically annualized to give their
  equivalent annual return (EAR)
• For our example

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Annualizing Returns (contd)

• We can also move in the opposite direction
• For our example

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Continuous Time

• In some applications, especially, derivatives, it
  is easiest to use continuous discounting/compoundi
  ng. This is to assume that there are an infinite
  number of periods, m, in a year.

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Continuous Time (contd)

• The formula is
• Note, that in Excel, this would be
• EXP(rt) - 1

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Continuous Time (contd)

• If the annual continuous time rate is 10, then
  the semi-annual, continuous rate is

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Continuous Time (contd)

• Finally, we can convert the discrete annual rate
  to the continuous annual rate as follows

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Continuous Time (contd)

• An annual, continuous rate of 10 is equivalent
  to

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Summary

• You should be able to
• Convert dollar returns to holding period returns,
• Holding period returns to EAR (and vice versa),
  and
• Use continuous-time returns and convert between
  continuous and discrete returns.

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Data Sites

• FRED
• http//research.stlouisfed.org/fred2/
• Data
• Interest rates
• CPI, PPI
• Banking Data
• Macroeconomic Data

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Data Sites (contd)

• Edgar
• http//www.sec.gov/edgar.shtml
• SEC files since 1993
• Millions of forms
• EdgarScan
• http//edgarscan.pwcglobal.com/servlets/edgarscan
• A better interface/search engine.

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Data Sites (contd)

• Money Central
• http//moneycentral.msn.com/
• An MSN/Microsoft Product
• Company Data
• Easy Download of Stock Prices
• You do need to install some of their software