© G.S.
Questa, 2016 Introduction [2016_08_31] Page 1 of 2
Giorgio S. Questa
Induction to Quantitative Methods in Finance
Preface and Table of Contents
The purpose of these notes is to provide a compact and straightforward introduction to some
basic mathematical concepts, aimed at finance students that have a limited quantitative
background. All top business schools routinely admit to master and MBA programs clever
applicants with a limited mathematical knowledge. Cass Business School is no exception.
I should mention that in 2015 some of the students who attended the course had a solid
quantitative background but wanted to improve their understanding of finance application.
[Mostly MSC students with a bachelor degree in engineering or economics.]
Finance can be extremely quantitative if we pursue some areas of research (such as financial
engineering) or work as a quant in investment banking or asset management. However, the
overwhelming majority of finance professionals need a sound conceptual understanding of
the risks and returns deriving from financial activity. Plunging into proofs and advanced
analytical developments is better left to specialists, with mathematically oriented masters and
doctorates (financial engineering, mathematics, physics, etc.).
It is interesting to note that the chief executives of the three largest global investment
banks (JP Morgan, Goldman Sachs, and Morgan Stanley) are all far from having a quant’s
background, but they certainly have a deep and clear vision of their businesses.
The same pattern applies to asset management companies. Just check the background of
some well-known professionals [for example Warren Buffett, George Soros, Stan
Druckenmiller, Julian Robertson, Steve Schwarzman, etc.]
However, this solid understanding of finance does require a good conceptual grasp of
some mathematics and statistics. Facilitating this understanding is the purpose of these
induction teaching notes.
Methodological points
The focus is on real-life finance
There are several examples of Excel use (functions, solver, random numbers generator,
etc.). This reflects the widespread use of Excel in the financial industry.
A lot of emphasis is placed on figures and numerical results. This helps in conceptualizing
and prepares for a professional environment dominated by computer monitors
[Bloomberg, Reuters, etc.]
If there will be a demand for it, I’ll be glad to write and post on Moodle a compact
mathematical appendix
Note on Mathematical Proofs
Clearly, somebody who wants to pursue a career in financial research or as a financial
engineering practitioner needs to become thoroughly familiar with the structure and methods
of mathematical proofs. However, for a time-constrained business student trying to delve in
proofs presents the following challenges:
The standard of proof in modern mathematics has become extremely rigorous and hard
to grasp without serious studies.
© G.S. Questa, 2016 Introduction [2016_08_31] Page 2 of 2
There are several branches of mathematics (such as complex numbers and spaces,
geometry, trigonometry, etc.) that are not much used in finance. However, they are often
required for the mathematical proofs of results that are widely used in finance
Acknowledgments
Jacopo Piana, Cass Business School PhD program
Dr. Marco Polenghi, Citigroup risk management
Professor Anh Tran, Cass Business School
Professor Lorenzo Trapani, Cass Business School
CONTENTS
1 Basic Pre-calculus
1 Power Functions, Discount Factors, Value Relatives, and Yields
2 The Summation Operator (∑) . Arithmetic Series
3 Geometric Series. Pricing Coupon Bonds
4 Linear Equations
5 Power, Exponential, and Log Functions
6 Linearity and Convexity
7 IRR and Bond Yield to Maturity (YTM)
2 Basic Calculus with Financial Applications
1 Functions and Limits
2 Derivatives
3 Taylor Series
4 Maxima and Minima of Functions
5 Linearity and Convexity. Gains from Convexity
6 The Logarithmic and Exponential Functions
7 Integrals
8 Log Yields (Continuously Compounded Yield)
3 Probability and Risk
1 Introduction
2 Frequency Distributions: Average, Variance, and Standard Deviation
3 Frequency Distributions: Covariance and Correlation
4 Probability and Random Variables
5 Discrete Distributions. The Binomial Distribution
6 The Normal (Gaussian) Distribution
7 The Lognormal Distribution
4 Vectors, Matrices, Solver, and Simulation
1 Vectors and Matrices in Excel
2 Vector & Matrix Multiplication
3 Variance of a Portfolio of Risky Assets
4 Solver to Maximize the Sharpe Ratio (SR)
5 Solving Linear Equations. Recovering Spot Yield Curve [SYC}
6 Monte Carlo Simulation (Brownian motion and Sharpe Ratio Applications)
