Applying Data Analytics in Finance

Syllabus

Course Description

In this course, we will introduce a number of financial analytic techniques. You will learn
why, when, and how to apply financial analytics in real-world situations. We will explore
techniques to analyse time series data and how to evaluate the risk-reward trade off
expounded in modern portfolio theory. While most of the focus will be on the prices, returns,
and risks of corporate stocks, the analytical techniques can be leveraged in other domains.
Finally, a short introduction to algorithmic trading concludes the course.

After completing this course, you should be able to understand time series data, create
forecasts, and determine the efficacy of the estimates. Also, you will be able to create a
portfolio of assets using actual stock price data while optimizing risk and reward.
Understanding financial data is an important skill as an analyst, manager, or consultant.

Course Goals and Objectives

Upon completion of this course, you should be able to:

 Understand the forecasting process.

 Evaluate a forecast.
 Describe time series data.
 Perform moving average analysis.
 Perform exponential smoothing.
 Develop a Holt-Winters model.
 Develop an ARIMA model.
 Understand how to create a portfolio of assets.
 Understand a basic trading algorithm.
 Course Materials
None are required. Suggested/optional readings are listed on the module readings pages.

Note that a good portion of the reading around forecasting is from Forecasting: Principles
and practice by Rob J. Hyndman and George Athanasopolous.

Elements of This Course

The course is comprised of the following elements:

 Lecture videos. In each module, the concepts you need to know will be presented through a
collection of short video lectures. You may stream these videos for playback within the
browser by clicking on their titles or download the videos. You may also download the slides
that go along with the videos.
 Practice Quizzes. Each module will include practice quizzes, intended for you to assess your
understanding of the topics. You will be allowed unlimited attempts at each practice quiz.
Each attempt may present a different selection of questions to you. There is no time limit on
how long you take to complete each attempt at the quiz. These quizzes do not contribute
toward your final score in the class.
 Module Quizzes. Each module will include 1 for-credit quiz. You will be allowed 3 attempts
per every 8 hours at each quiz. There is no time limit on how long you take to complete each
attempt at the quiz. Each attempt may present a different selection of questions to you. Your
highest score will be used when calculating your final score in the class.
 Lab Exercises and follow-up quiz. This course includes 4 lab exercises and their follow up
quizzes. You can attempt these lab exercises as practice. They are not graded, but you have to
answer the follow-up quizzes based on the results of the lab exercise practice. The follow-up
quizzes are graded. You will be allowed 3 attempts per every 8 hours at each quiz. There is
no time limit on how long you take to complete each attempt at the quiz.
How to Pass This Course
To qualify for a Course Certificate, simply start verifying your coursework at the beginning
of the course and pay the fee. Coursera Financial Aid is available to offset the registration
cost for learners with demonstrated economic needs. If you have questions about Course
Certificates, please see the help topics here.

If you choose not to pay the fee, you can still audit the course. You will still be able to view
all videos, submit practice quizzes, and view required assessments. Auditing does not include
the option to submit the required assessments. As such, you will not be able to earn a grade or
a Course Certificate.

The following table explains the breakdown for what is required in order to pass the
class and qualify for a Course Certificate. You must pass each and every required
activity in order to pass this course.

Estimated
Name of Required Number per % Required
Hours per
Activity ? Module to Pass
Module
Lecture
Yes 5-14 1-1.5 N/A
Videos
Readings No 2-3 2 N/A
Practice
No 1 0.5 N/A
Quizzes
Module
Yes 1 0.5 80%
Quizzes
Lab
Yes 1 1 N/A
Exercise
Lab
Exercise Yes 1 0.5 80%
Quiz
Glossary
Here you will find the description of some words and phrases that pertain to the concepts
in this course, and also words and phrases used in the videos and readings. If you want to
add another word or expression that we missed, please suggest in it in the forums.

ACF: Autocorrelation function. This term is used to describe the correlation between
values of the same time series with its lagged values. The ACF is frequently used to identify
the order of a moving average model MA(q). The ACF of a true MA(q) model will be zero
after the qth lag. A plot of the ACF against the lag is known as the correlogram.

AIC: Akaike’s Information Criterion. The AIC provides a measure of the goodness-of-fit of
a model which takes into account the number of terms in the model. It is commonly used
to compare ARIMA models against competing ARIMA models. The AIC is equal to twice the
number of parameters in the model minus twice the log of the maximum value of the
likelihood function. The theory behind the AIC was developed by Hirotogu Akaike and is
based on “entropy maximization”.

ARIMA: An abbreviation for Auto Regressive Integrated Moving Average which is used to
forecast a single time series. It has 3 parts: AR (p) -auto regressive, I(d) -integrated and MA
(q)- moving average. The model is often denoted ARIMA(p,d,q).

Asset: A tangible or intangible item that can be possessed to produce economic value.

Autocorrelation: See ACF.

Autoregressive (AR) model: Autoregression is a form of regression, but instead of the

variable to be forecast being related to other explanatory variables, it is related to past
values of itself at varying time lags. In other words, an autoregressive model would
express the forecast as a function of previous values of that time series.

Backtest: The process of validating and analysis a trading strategy based on historical
data.

BIC: Bayesian Information Criterion. Like the AIC, the BIC is an model selection criteria for
ARIMA models. It was developed by Gideon E. Schwarz (1978).

Capital Allocation Line (CAL): A line that graphs the risk of portfolios that are a
combination of a portfolio of risky assets risk-free assets.
Confidence interval: Based on statistical and probability theory, a confidence interval is
calculated from observed data to estimate the value of an unobserved population value
such as the mean. The confidence interval represents the range of values of the
population parameter such that the difference between the population parameter and the
estimate is not significant at the level of the confidence interval.

Correlation coefficient: A standardized measure of the association between two

variables, say X and Y. Commonly designated as r, its values range from −1 to +1,
indicating strong negative relationship, to strong positive association. Values close to zero
mean no linear relationship. The correlation coefficient is calculated as the covariance
standardized with the standard deviations of the tow random variables.

Covariance: This is a measure of the joint variation between two random variables, X and
Y. The range of covariance values is unrestricted (large negative to large positive).
However, if the X and Y variables are first standardized, then covariance is the same as
correlation and the range of covariance (correlation) values is from −1 to +1.

Critical value: In hypothesis testing, the critical value is the threshold for significance. A
test statistic beyond the critical value gives a significant result.

Differencing: When a time series is non-stationary, it can often be made stationary by

taking differences of the series—that is, creating a new time series of successive
differences (Xt−Xt−1). If first differences do not convert the series to stationary form, then
first differences of first differences can be created. This is called second-order differencing.
A distinction is made between a second-order difference (just defined) and a second
difference (Xt−Xt−2Xt−Xt−2).

Diversification: It is the process of allocating capital in a way that reduces the exposure to
any one particular asset or risk.

Efficient Frontier: A set of optimal portfolios that offer the highest expected return for a
defined level of risk or the lowest risk for a given level of expected return.

Forecast error: A forecast error is calculated by subtracting the forecast value from the
actual value to give an error value for each forecast period. An error is the difference
between the forecast obtained from the model and the actual value.

Function: A function is a statement of relationship between variables. Virtually all of the

quantitative forecasting methods involve a functional relationship between the item to be
forecast and either previous values of that item, previous error values, or other
explanatory variables.

Integrated: This is often an element of time series models (the I in ARIMA models) and
indicates the number of differences needed to get a covariance-stationary time series.

Lag: A difference in time periods between an observation and a previous observation.

Thus Yt−kYt−k lags YtYt by k periods.

Long: When an investor buys an asset, the investor is said to have a long position.

Mean: The arithmetic average or mean for a group of items is defined as the sum of the
values of the items divided by the number of items. It is frequently used as a measure of a
central tendency for a frequency or probability distribution.

Minimum Variance Portfolio: The point on the efficient frontier that represents the
portfolio with the least variance.

Model: A model is the symbolic representation of reality. In quantitative forecasting

methods a specific model is used to represent the basic pattern contained in the data.
This may be a regression model, which is explanatory in nature, or a time series model.

Momentum: Rate of rise or fall of an asset price.

Non-stationary: A time series exhibits non-stationarity if the underlying generating

process does not have a constant mean and/or a constant variance.

Parameter: Characteristics of a population such as the mean or standard deviation are

called parameters. These should be distinguished from the characteristics of a sample
taken from a population, which are called statistics.

Partial Autocorrelation: This measure of correlation is used to identify the extent of

relationship between current values of a variable with earlier values of that same variable
(values for various time lags) while holding the effects of all other time lags constant.
Portfolio: A collection of assets held by an investor.

Position: Refers to the ownership of the asset.

P-value: Used in hypothesis testing. The P value is the probability of obtaining a result as
extreme as the one calculated from the data, if the hypothesis to be demonstrated is not
true.

Random walk: Random walk is a time series model which states that each observation is
equal to the previous observation plus some random step.

Regression: A term “regression” dates back to Sir Francis Galton and his work with the
heights of siblings in different generations. The heights of children of exceptionally tall (or
short) parents “regress” to the mean of the population. Regression analysis today means
any modeling of a forecast variable Y as a function of a set of explanatory variables X1X1
through XkXk.

Return: Profit or loss generated by an investment in an asset or a portfolio.

Risk: The chance an investment might not achieve its expected targets

RSI: A momentum indicator that charts the strength of any moves in asset price.

Sharpe Ratio: A measurement that help determine the risk-adjusted return of a

portfolio/asset.

Short: When an investor borrows an asset and sells it the market.

Standard Deviation: Measures the variability of the expected rate of return of a

portfolio/asset

Stationary: A time series is stationary when its statistical properties such as mean,
variance, and covariance remain unchanged over time.

Systematic risk: The risk inherent to the entire market or market segment.

Tangency Portfolio: The portfolio with the highest Sharpe Ration. the point where the
CAL is tangent to the Efficient Frontier.
Time Series: An ordered sequence of values of a variable observed at equally spaced time
intervals is referred to as a time series.

Time Series Model: A time series model is a function that relates the value of a time series
to previous values of that time series, its errors, or other related time series.

Unsystematic risk: Also known as diversifiable risk, is the risk that relates to a particular
security or a portfolio of securities.

Variance: A summary statistic (parameter) for a sample (population). It is usually denoted

S2(σ2). It is the average of squared deviations from the mean.

Weights: The ratio of capital composition within a portfolio.

White noise When there is no pattern whatsoever in the data series, it is said to represent
white noise.
Resources for R
If you are not familiar with R, you can go to Introduction to Business Analytics with R to
learn more about this tool.

Introduction to Business Analytics with R, one of the Business Analytics courses in the
iMBA program at the Gies College of Business, is taught by Professor Ron Guymon and
Professor Ashish Khandelwal.
About the Discussion Forums
Expectations

With the large number of learners in this course, no one is expected to read every post
made within the discussion forums. Rather, read those that seem interesting to you and
reply when you can further the conversation. Above all, you are expected to remain civil
and treat all other learners with respect. Failure to do so will result in your removal from
the course.

Helpful Tools

Searching For Posts

You can search for a post by using the Search box at the top of any individual forum or the
All Course Discussions page. It may be helpful to see if your topic or question has already
been covered before posting. If so, you can reply to that thread instead of starting a new
one. You can also click on someone's name in the forums (including your own) to see all of
the posts that have been made by that person.

Upvoting Posts

When you view any post, you will see an Upvote button under each post. Click the button
to draw attention to thoughtful, interesting, or helpful posts. In the course feedback
forums, upvoting will ensure that important questions get addressed. The upvoting
system is the best way elevate the best posts to be seen by other learners and University
of Illinois staff.

Reporting Inappropriate Posts

Please report any posts that are abusive, offensive, that infringe upon copyright, or that
otherwise violate Coursera’s Honor Code by using the Report this option found under the
menu arrow to the right of each post.

Following

If you find a particular thread to be interesting, click the Follow button under the original
post of that thread page to receive email notifications when new posts are made.

Improving Your Posts

The forums are your chance to interact with thousands of like-minded individuals on
these topics. Getting their attention is one way to do well in this course. In any social
interaction, certain rules of etiquette are expected and contribute to more enjoyable and
 productive communication. The following are tips for interacting in this course via the
forums, adapted from guidelines originally compiled by AHA! and Chuq Von Rospach &
Gene Spafford:

1. Search the other posts to see if your topic is already covered. If it is, reply to that thread
instead of starting a new one.
2. Post in the most appropriate forum for your topic, and do not post the same thing in
multiple forums.
3. Use a meaningful title for your thread.
4. Be civil. If you disagree, explain your position with respect and refrain from any and all
personal attacks.
5. Stay on topic. In particular, don’t change the subject in the middle of an existing thread –
just start a new topic.
6. Make sure you’re understood, even by non-native English speakers. Try to write full
sentences, and avoid text-message abbreviations or slang. Be careful when you use humor
and sarcasm as these messages are easy to misinterpret.
7. If asking a question, provide as much information as possible, what you’ve already
considered, what you’ve already read, etc.
8. Cite appropriate references when using someone else’s ideas, thoughts, or words.
9. Do not use a forum to promote your product, service, or business.
10. Do not post personal information about other posters in the forum.
11. Ignore spammers and report them.
For more details, refer to Coursera's Forum Code of Conduct.
 Module 1 Overview
Overview

In this module, we will introduce an overview of financial analytics. Students will learn
why, when, and how to apply financial analytics in real-world situations. We will explore
techniques to analyze time series data and how to evaluate the risk-reward trade off
expounded in modern portfolio theory. While most of our focus will be on the prices,
returns, and risks of corporate stocks, the analytical techniques can be leveraged in other
domains. Finally, a short introduction to algorithmic trading concludes the course.

Goals and Objectives

After completing this module, you will be able to:

 Develop a basic understanding about financial analytics: its definition and specific
examples
 Utilize an overview framework of financial analytics to generalize the procedure of
financial analysis: the source of data, tools to analyze it, and its application for enhancing
operating performance (from automate to transform and automate)
 Understand time series data and how to deal with time series data using R codes to
generate forecasting models that can be applied to enhance business performance

Key Phrases/Concepts

Look for the following key terms or phrases as you complete the readings and interact
with the lectures. These topics will help you better understand the content in this module.
Please visit the Glossary page for more keywords and descriptions.

 Forecasting
 Time series
 Financial analytics
 Linear regression
 Average method

Guiding Questions

As you complete the lectures and assignments, you will be able to develop answers to the
guiding questions. These questions should be the focus of your learning.

 What is financial analytics?

 What is the importance of financial analytics?
 What is time series data?
 What is the purpose of using time series data in financial analytics?
 Time

This module should take approximately 5 hours of dedicated time to complete, with its
readings and assignments.

Agenda

Content Estimated Duration

Module 1 Lectures 90 minutes
Module 1 Readings 90 minutes
Module 1 Quiz 30 minutes
Module 1 Lab Exercise 60 minutes
Module 1 Lab Exercise Quiz 30 minutes

Getting and Giving Help

You can get/give help via the following means:

 Use the Learner Help Center to find information regarding specific technical problems.
For example, technical problems would include error messages, difficulty submitting
assignments, or problems with video playback. If you cannot find an answer in the
documentation, you can also report your problem to the Coursera staff by clicking on the
Contact Us! link available on each topic's page within the Learner Help Center.
Note: Due to the large number of students enrolled in this course, the instructor is not able
to answer emails sent directly to his account. Rather, all questions should be reported as
described above.
 Module 1 Readings
Required Readings

 Hyndman, R. J., & Athanasopoulos, G. (2019). Forecasting: Principles and Practice. OTexts.

Chapter 2, 3.1, 5.2, 5.4, 5.8, 5.5.
 Bell, F & Smyl, S. (2018). Forecasting at Uber: An Introduction. Uber Engineering

Lecture Slides

Look for the file of

https://d3c33hcgiwev3.cloudfront.net/taohPM5yEemmYQ6T1GJwxA_57246d6ed2dc45b29
35a5dfc0cd0ef80_Module_1_Lecture-Slides.pdf?
Expires=1652140800&Signature=fVF6oWTEBuX7~oIDCSFvAxVqVfUwakKp83vZRbGj-O0wZC-
pGcpk8gctQzbXPoL7kxWPArCmpbxQv1N~E06mAatr4rUEaYBnwaXJH-3fpLTsPibw~-
VP2moeQuLT0fODgvu2a86AfNu5FxYVuPaQgKsd1uE0HW13ZTgKKKS9p8Y_&Key-Pair-
Id=APKAJLTNE6QMUY6HBC5A