1

Welcome

• You have been given a handset as you entered

• Please don’t press any buttons yet! You may accidentally stop it working.

• At the end of the session leave the handset with the attendant at each exit

- Please don’t steal any – they are of no use without the rest of the system

2

• When you are prompted to answer a question press the button firmly

• As you vote check for the green light– If it flashes green your vote

counts– If it doesn’t, try again

• One vote per handset– only your most recent answer

will count

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Let’s try it out with a simple question

• Remember:

• Look out for the green light on the handset which flashes top indicate that your vote has been received

• No need to hurry….

4

How did you travel to university today?

Tube/

train

Bus

Bic

ycle

Wal

king

Oth

er

62%

23%

0%

15%

0%

1. Tube/train

2. Bus

3. Bicycle

4. Walking

5. Other

This slide shows…?

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Excel for advanced calculations

John Cubbin

6

Outline

Week 1

• Excel from basics to advanced functions

Week 2

• Excel add-ins and introductory programming ideas, recording macros

Week 3

• Amending recorded macros using VBA programming language

7

Applications

Week 1

• Portfolio mean and variance

Week 2

• Simple Monte Carlo analysis

Week 3

• Revision

8

Reading

• Mary Jackson, Mike Staunton Advanced modelling in finance using Excel and VBA Wiley 2001.– Chapters 2-3 possibly 4 for more advanced

students

9

Have you used Excel before?

No, n

ot rea

lly

For e

lem

enta

ry o

pera.

..

For m

odera

tely

com

p...

Hav

e re

cord

ed m

acro

s

Can

pro

gram

in V

BA

0%

58%

0%

8%

33%

1. No, not really

2. For elementary operations only

3. For moderately complex calculations

4. Have recorded macros

5. Can program in VBA

10

Have you worked in the finance or economics area before?

31%

62%

8%

Yes No Not sure

1. Yes

2. No

3. Not sure

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What can Excel do in Finance?

Examples of problem1. Demonstrating key concepts2. Portfolio selection3. Option pricing4. Value at risk5. Non-lognormal returns

Methodologies1. Simulation of markets:

Monte Carlo and bootstrapping2. Numerical solution of problems with no analytic

solution

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Advantages and disadvantages of Excel

Advantages• Wide range of powerful techniques• Input and output need little programming• Example 1

Disadvantages

• Not a compiled language

•Slower than specialised mathematical programming languages

13

Good practice in spreadsheet work

• Transparency– Make it clear what is going on– Group obvious things together– Keep background stuff out of the way

• Documentation–Where it is not self evident, add labels, comments etc.

Other people (and yourself later) may need to work out what on earth is going on! It is not easy to know. Example 2

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Good practice (2)

• Auditing –necessary to ensure accuracy– Make use of check sums and conditional formatting to

trap errors– Use the formula auditing tool box to make sure your

intentions have been fulfilled

– Do a series of calculations where you know the correct answer to make sure you are returning sensible results

– In important applications, get another person to audit and comment on your work

15

How am I getting through? Am I going…

Too s

low

About

righ

t

Too fa

st?

8%0%

92%1. Too slow

2. About right

3. Too fast?

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How much is new?

All

this

is n

ew to

me

Most

is n

ew to

me

Som

e th

ings

are

new

..

I kn

ew a

lmost

all

this

...

17%

8%

33%

42%1. All this is new to

me

2. Most is new to me

3. Some things are new to me

4. I knew almost all this before

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To test your understanding, the Rand() function in Excel:

Cre

ates

a n

orm

ally

di..

.

Cre

ates

a n

umbe

r enti.

..

Rep

licat

es th

e th

row

..

Cre

ates

a u

nifo

rm d

is...

0%

38%

0%

62%1. Creates a normally

distributed variable

2. Creates a number entirely at random

3. Replicates the throw of a die

4. Creates a uniform distribution in the range {0,1}

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Section 2: More advanced functions

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More advanced functions

• Arrays

• Frequency

• Lookup

• Regression approaches

• Random number generation

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Arrays

1xN, NxN, Nx1, NxM

Each array can be given a name as follows:

Select a range

From the menu select Insert…, Name, Define

If there is a label at the top or side of the array this will be the default name

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Frequency

Counts the cells with a given frequency

Format is Frequency( data array, bins array)

The key to using formulae covering a whole array is to press CTRL +Shift+ Enter instead of Enter when you have entered the formula.

See Example 3

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Lookup

Value Result

10 Fail

20 Fail

50 Pass

60 Merit

70 Distinction

See Example 4

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Regression

Three ways (at least) to do regression:

1. Program all the formulae yourself

2. Use Statistical functions Intercept, slope, RSQ, etc

3. Use Linest Array function

4. Use Data Analysis Add-In, Regression Analysis

Dynamic

Dynamic

Dynamic

Static

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Random Number Functions

Much literature on random numbers

- In real life applications, make sure you get a good one with long cycle time

- For teaching purposes, Excel functions work fine

- You have already come across Rand(), which gives an outcome in the range {0,1}. This is dynamic

- This can be used to create other random distributions

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Turning Rand() into a normal distribution

0

1

Cumulative probability F

Z

F converts a Standard Normal distributed variable into a variable in the range {0,1}

The inverse of F does the opposite

We can use this fact to convert a uniform random variable into a normally distributed variable

The Excel command is NormSInv(Prob)

This is a clever trick which can be used with other probability functions whose cumulative function has an inverse

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Static random numbers

In Tools…Data analysis…

You can generate number of different distributions.

However these are generated just once and not recalculated.

Rand() is recalculated every time. To stop this happening you can do Copy... Paste Special…Values

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Random number generation…

Can

be

done d

iffer

en...

Nee

ds ca

re in

sel

ecti.

.

Is h

elped

by

the

use

..

All

of the

above

11%

67%

0%

22%

1. Can be done different ways in Excel

2. Needs care in selection for proper research

3. Is helped by the use of an inverse function

4. All of the above

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To create an array variable press…

CTRL+

Shift

+ Del

Alt+

Shift

+ Ente

r

CTRL +

Shift

+Ente

r

0%

100%

0%

1. CTRL+ Shift + Del

2. Alt+ Shift+ Enter

3. CTRL +Shift +Enter

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HomeworkFirst program the following in Excel:

The expected returns on a portfolio of two assets X1 and X2 with returns R1 and R2 is

RE = w1R1 + w2R2 ; In a specific case R1 =10% R2=3%

SD1 = 0.15 SD2 = 0.02 Correlation coefficient r (X1X2) = 0.1

Work out the portfolio that would be required to earn an expected return of 7.2%.

What is the standard deviation of this portfolio’s returns?

Recall that the variance of a weighted average is

w12Var(X1) + w2

2Var(X2) -w1w2Cov(X1X2)

and

r = covariance /(sqrt of product of variances)

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This questions looks…

Ver

y di

fficu

lt

Chal

lengin

g but d

o-able

Do-a

ble w

ith s

ome

effo

rt

Quite

eas

y

Wro

ngly

con

ceiv

ed

18%

64%

0%

9%9%

1. Very difficult2. Challenging but

do-able3. Do-able with

some effort4. Quite easy5. Wrongly

conceived

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Homework continued

• How can you be sure this is the correct answer?

• How would you generalise this spreadsheet for multiple assets?

Next be prepared to discuss the following questions:

You may work in groups of 2 or 3

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