Computational Investing: Presentation to SC Python Meetup on 10/11/16

1. D E N N I S H A R V E Y
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Computational Investing
using Python

2. Credits
! Based on the Georgia Tech Coursera course:
! https://www.coursera.org/learn/computational-investing
! Instructor: Tucker Balch

3. Schools of thought
! The market is efficient and random
! You can’t really beat or time it
! The best solutions are a diversified set of funds
" Exchange Traded Funds (ETFs)
" Low fees
" iShares, BlackRock
" https://www.ishares.com/us/lp/ishares-vs-vanguard-fees
! Winning the Loser's Game, 6th edition: Timeless
Strategies for Successful Investing
! By Charles Ellis

4. Schools of thought
! High frequency trading (HFT)
! Flash Boys: A Wall Street Revolt, by Michael Lewis
! Renaissance Technologies LLC (Rentec) is an
investment management company dedicated to
producing superior returns for its clients and
employees by adhering to mathematical and
statistical methods.
! Founded by James Simons, 1982
! Renaissance's flagship Medallion fund is famed for one of the
best records in investing history, returning more than 35
percent annualized over a 20-year span.

5. Schools of Thought
! “Wide diversification is only required when
investors don’t understand what they are doing”
! Warren Buffett
! “We believe that according the name ‘Investors’ to
institutions that trade actively is like calling
someone who repeatedly engages in one-night
stands a ‘romantic’.”
! Warren Buffett

6. Fees
! Example: $100K invested for 20 years at 7%
! Assume “admin” fees of 1.5%
! Investment grows to $387K at 7%
! But you get only 5.5%
! Which grows to $293K
! Wealth mgr or mutual fund takes $94K or 24%
" Based on your money; they have no money at risk
! http://www.nytimes.com/2016/04/07/your-money/new-
rules-for-retirement-accounts-financial-advisers.html

7. Who’s Right?
! Possibly both?
! The diversified, ETF approach is probably good for most
investors
! Computer driven trading appears to be lucrative for a small
number of investment companies and traders

8. Capital Assets Pricing Model (CAPM)
! A model that describes the relationship between risk and
expected return and that is used in the pricing of risky
securities.
! Investors need to be compensated in two ways: time
value of money and risk.
ri = beta * rM + alpha
Where:
beta is measure of risk relative to the market
! alpha is residual value
! Nobel prize in 1990: Markowitz, Miller and Sharpe

9. Stock Betas

10. Medallion Fund

11. NumPy (numpy.org)
! NumPy is the fundamental package for scientific
computing with Python.
! It contains among other things:
! a powerful N-dimensional array object
! sophisticated (broadcasting) functions
" How numpy treats arrays with different shapes during arithmetic
operations.
! useful linear algebra, Fourier transform, and random number
capabilities

12. Pandas (pandas.pydata.org)
! Set of labeled array data structures: Series and DataFrame
! Index objects enabling both simple axis indexing and multi-level /
hierarchical axis indexing
! An integrated group by engine for aggregating and transforming
data sets
! Date range generation (date_range) and custom date offsets
enabling the implementation of customized frequencies
! Input/Output tools: loading tabular data from flat files (CSV,
delimited, Excel 2003), and saving and loading pandas objects from
the fast and efficient PyTables/HDF5 format.
! Memory-efficient “sparse” versions of the standard data structures
for storing data that (mostly) missing or constant
! Moving window statistics (rolling mean, rolling standard deviation,
etc.)
! Static and moving window linear and panel regression

13. QuantSoftware ToolKit
! QSToolKit (QSTK) is a Python-based open source
software framework designed to support portfolio
construction and management.
! http://wiki.quantsoftware.org/index.php?
title=QuantSoftware_ToolKit

14. Let’s look at some code …

15. Our test model
! Identify stocks on the SP500 between 2008-1-1 and
2009-12-31 that drop below $8
! Buy 100 shares, hold for 5 days, and then sell.

16. Market Simulator
Historical
Data
Event
Definition
Events &
Orders
Buy/Sell
Market
Simulator
(python)
Holdings
Portfolio
Value
Market
Simulator
(python)
Event
Profiler
(python)
Simulated
Fund
Results

17. Thank you
! rdennisharvey@gmail.com
! @harveyrd