RM 392 - Financial Modeling and Optimization

Fall 2011



1.      Learning Objectives

A.    Today’s discussions

a.       F 2010 Midterm Problem 1

b.      Project selection using asset allocation models

B.     Homework and reading assignment for this session.

a.       Project selection using asset allocation models

2.      Open the files “FMOmidtermF2010.docx” and “4projects_5scen.xlsx” on our website under class 20.  Each group does problem 1a.  Then we discuss it as a class. We do the same with problems 4b and 4c.  Problem 4c is a small version of the problems in EPPO_new.xlsx, discussed in class 19.

3.      We revisit eppo_new.xlsx for a few points not reached in the last class:

A.    We solve the problem of maximizing portfolio enpv with a budget limit of $1300, and show that the solution is governed by the “bang/buck” ratio.

B.     We solve the risk minimization model with go-no projects

C.     We discuss the results tab 

4.      Each group opens “DCF TX EXPL ONSHORE.XLS” on our website under readings\project evaluation and selection.  This is a scenario generator for oil drilling projects using the Crystal Ball Excel add-in for Monte Carlo simulation.  It is described in the paper “E&P Portfolio Paper 103105.doc” under the same topic. 

A.    We discuss the slides O&GPortfolioOpt.ppt, referring to the DCF spreadsheet.

B.     We open the spreadsheet and examine the model structure

a.       What each tab does

b.      How tabs are related

c.       The Prod tab

d.      The DCF tab

e.       Others

C.     What is the main output used to generate the scenarios

5.      We discuss the paper “E&P Portfolio Paper 103105.doc”, on our website under readings/project evaluation and selection.

6.      Homework Assignment

A.    Email the TA brief 1 to 2 paragraph proposals describing your term project.  Include the names of the people who will work on it.  Describe the topic, what you will do, and the deliverables.

B.     Begin reading the following documents under “multiperiod asset allocation and asset/liability models” on our website: multiperiod portfolio models.pdf, multistage optimization.pdf, volatility pumping.pdf.  We will discuss these in the next class or the one after that.