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I just noticed from my stats counter that my blog is getting hits from universities like Berkeley, CMU, Duke, etc., and also from other countries (Kuwait, India, Hongkong, Canada). While I am very honored, I also request my readers to leave comments and make this a truly interactive medium.

thanks much!! :)-

Fixed Income Securities

Bond math

Tried to crack open the books again this week. Went to study session 15-16 on fixed income securities. Found the subject really fascinating.. it was very intuitive yet had some very good concepts that I had never thought of - convexity, duration, price-yield curve, Yield to maturity, etc.

Anyways, I couldn't understand some of the concepts by just reading, so decided to use my FE skills (hey I need to do this more often now, isnt it?) to write a small function on bond valuation in MATLAB (see figure). Looks like this may be my first program in Financial engineering. A simple 5 line code, but it did give me a lot of insight into a powerful concept.

Weather derivatives

Interestingly, hedgefund street carried a story on a new hedge fund being launched in the weather derivative space. I have always been fascinated with weather related (commodities and energy) and catastrophe-linked securities, and would like to learn more about this area. The main indices used are HDD (heating degree days) and CDD (cooling degree days) around which most of the contracts are structured, however one can be creative and use any such indice as the underlying.

Most of these contracts are OTC and are very low volume at present. I hope that more and more corporations find value in such instruments and the industry starts to take off.

Accepted..!!!

Got the call from Christina. The much awaited call. I am in at Berkeley. Haas, here I come.

Interesting article on FE careers

FE careers link

Portfolio theory

Spent a good chunk of time studying for the CFA. I started learning session 12, which is on portfolio management, because I was very interested in learning about Markowitz MPT (modern portfolio theory). The lesson deals with acronyms such as MPT, CAPM, SML, CML, etc. The basic idea is that the expected return of a security is related not to the total risk of a security, but only to the systematic risk (market risk).

I am done with 2 study sessions (out of a total of 18). Still long ways to go.

next up: study session 13, which is on asset valulation - securities markets. Seems easy, not too much theory, just a lot of information.

Time-weighted rate of return

I used to be always interested in figuring out the rate of return shown on my fidelity 401K page. Well, now I know (thanks to my CFA studies): It is computed using the time-weighted rate of return. The other return commponly used is the money-weighted rate of return, which treats investments like cash flows and computes the IRR.

Definition: Geometric mean return
Also called the time-weighted rate of return, a measure of the compound rate of growth of the initial portfolio market value during the evaluation period, assuming that all cash distributions are reinvested in the portfolio. It is computed by taking the geometric average of the portfolio subperiod returns.