September 2011

Volume 2: Issue 3

Quantinuum Newsletter

Quantinuum Newsletter
VOLUME 2:ISSUE 3 SEPTEMBER 11
FROM THE FACULTYS DESK;

From the Facultys Desk...

Hi All, All of us are learning data analysis and data modelling techniques during our studies. Its high time we also understood how to use the techniques. Perhaps, the following articles will help you understand the issues and identify opportunities in the area of data handling. Mastering the art of collecting and analyzing massive amounts of data is now mission-critical for companies hoping to gain and hold competitive advantage. Are you ready for the era of big data? defines this new territory and poses five questions that every executive should consider when building a data strategy. In a companion piece, Competing through data: Three experts offer their game plans (which includes multimedia features), a leading academic expert, an entrepreneur, and a winning college basketball coach home in on how to use data to gain an edge. The above articles are available in the recent issue of McKinsey Quarterly, which can be accessed at https://www.mckinseyquarterly.com The September issue is in your hands in which we have tried to cover the usual topics. As all of you are aware, space limitation restricts us from elaborating on any of the topics. We do expect readers to follow up the leads and read and understand more. We also expect readers to comment and point out errors and omissions by writing in.

MAIN STORY : GOLDEN RATIO ABIN ABRAHIM QUANT NEWS DIGEST

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QUANCEPT OF THE MONTH: UTILIZATION FACTOR

QUANTITAIVE ANALYSIS OF HEDGE FUNDS: BRIJI KOMBAN

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QUANT GURU OF THE MONTH: PAUL PIERRE LEVY HARSHITA SHRIVASTAV E-TAMBOLA: QUANTINUUM EVENT OF THE MONTH GUNJAN JADON QUANTS IN A LIGHTER VEIN: MANISHA AGARWAL

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QUANT QUERIES OF THE MONTH EDITORIAL TEAM

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Happy reading. Regards Prof N.S.Nilakantan TEAM QUANTINUUM

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MAIN STORY : The Golden Ratio

What connects Mathematics, Advertising, Leonardo Da Vinci, the Great Pyramid and the Stock Market? The wide range enlisted should keep one wondering for long. Learning is all about understanding patterns. The connection is the golden ratio. In mathematics and design two quantities are in the golden ratio if the ratio of the sum of the quantities to the larger quantity is equal to the ratio of the larger quantity to the smaller one. The golden ratio is an irrational mathematical constant, approximately 1.6180339, it is also known as the divine proportion, golden mean, or golden section. It is denoted by , or phi. Almost everything has dimensional properties that adhere to this ratio; it seems to be a fundamental function for the building blocks of nature, hence may be the divine proportion name-tag. The Fibonacci Series 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, The ratio of each successive pair of numbers in the series approximates phi (1.618. . .), as 5 divided by 3 is 1.666..., and 8 divided by 5 is 1.60.Going further the ratio of successive pairs converge to the golden ratio. Phi appears in: The proportions of the human body Plants DNA The solar system Art and architecture Music Population growth The stock market Logo and Product design Few of its application which are directly relevant to us b-school students: Advertising: Phi is recognized for its ability to give a sense of aesthetic appeal in balance and harmony of design. Product logos represent an image that must make a positive and memorable impact on the conscious and subconscious minds of consumers, so it is no surprise to find phi proportions in many logos of major companies. Pepsi, Toyota, Nissan,the list goes on. An extension of the golden ratio, the golden rectangle is used for this purpose. In the diagram, a/b=(a+b)/a=

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Now notice the same applied in the design of the Toyota logo.

Fascinating isnt it? It has also been used in product form design. Stock Market Analysis and forex analysis: The golden ratio, or phi, appears frequently enough in the timing of highs and lows and price resistance points used in technical analysis of the markets. This helps in identifying key turning points. When used in technical analysis, the golden ratio is typically translated into percentages: 38.2%, 50%, 61.8% and 100% which are obtained by dividing subsequent numbers in the Fibonacci series. The movements in forex rate can be predicted with this ratio in a similar pattern. Business learns a lot from history. The perennial debate on whether business is a science or an art has been going on for long. But the marvels that art has produced have many lessons to be learnt from. Architecture and Art: The Great Pyramid of Giza built around 2560 BC is one of the earliest examples of the use of the golden ratio. The length of each side of the base is 756 feet, and the height is 481 feet. So, we can find that the ratio of the vase to height is around 1.6. There are many more examples which can be given. Da Vinci used the ratio in painting his Last Supper, Vetruvian Man and the Mona Lisa. Now as somebody once said, wouldnt the world have been a zero if there wasnt mathematics?

ABIN ABRAHIM PGDM-B 2011-2013

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QUANT NEWS DIGEST

Mathematicians ruling the market: Mathematics which had previously played a role in risk management is now extending its influence to make money. A recent study has shown that Investment decisions are no longer being made by financiers, but increasingly by PhD mathematicians. Firms are now employing academic statisticians to track patterns or trends in trading behaviour and create formulae to predict future market movements. These formulae are then fed into powerful computers that buy and sell automatically according to triggers generated by the algorithms. Computers monitor market movements as well as trading trends in a process called high-frequency trading, in which stocks can be held for just a matter of seconds. These programs are immensely powerful, constantly monitoring trading patterns and news flows and are capable of changing strategies within fractions of a second. BBC News, 25 September 2011 Compiled by Manisha Agarwal

U.S., U.K. Regulators to Weigh High-Frequency Registration Top market regulators of the U.S. and the U.K. this week will discuss the idea of formally registering high-speed electronic trading firms, the chairman of the U.S. Commodity Futures Trading Commission said Tuesday. So-called high-frequency tradinga method of rapidly buying and selling securitieshas come under scrutiny in recent years as slower-moving investors have raised concerns around being outpaced, and financial markets have increasingly come to rely on the liquidity offered by such firms. The May 2010 "flash crash" saw several of the largest high-speed electronic traders pull out of the market, citing problematic data coming from exchanges. Critics said their exit left fewer buyers to curb a wave of selling that briefly drove down the Dow Jones Industrial Average by about 1,000 points. However, some like the CFTC's Mr. Chilton have raised concerns that regulators' reach isn't far enough to cover firms that wield trading algorithms with the potential to disrupt markets if they aren't used properly The WallStreet Journal, Oct 11, 2011 Compiled by Prof N.S. Nilakantan

Novel math theory - Success of certain cancer therapies can be predicted: A research highlighted the emerging promise of applying mathematical and computational concepts to the study of complex biological systems. With some simple measurements, it was found that one can determine when a cancer is addicted to a particular cancer gene and will respond to therapy targeting that gene. The phenomenon is called oncogene addiction, in which a cancer is dependent on the activity of one cancer-causing gene. However, because individual cancers reflect the interplay of hundreds or thousands of mutations within each cell, it's very difficult to tell which, or how many, tumours fall into that category. An equation was used to predict the kinetics of tumour cell elimination in cancer patients. The key point is that there's a certain rate of regression where you're never going to get rid of your cancer completely, but at another rate you will. ScienceDaily, October 6, 2011 Compiled by Manisha Agarwal

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QUANCEPT OF THE MONTH: UTILIZATION FACTOR

While analyzing Queueing applications, we discuss a most important question. Try to answer the question given below: If you have an average arrival rate of 20 customers per hour and your service time is 3 minutes per person on an average, what is the utilization factor and what will be the length of the queue? While many will calculate the utilization factor correctly as 1, which is the arrival rate by the service rate, the calculation of the length of the queue is not always correctly done. Many are bound to say that the length of the queue is zero, which is wrong. Here, we bring in the concept of average and understand it in the context of an associated variance. Since we are dealing with a mean and a variance ( i.e. deviation from the mean), the lower arrival rate at some point of time will lead to idle time of the server but the higher arrival rate will lead to overload and need not be matched with a higher service rate. Hence the utilization factor of 1 is not found workable in the long run and will lead to an infinite queue length. For the system to be stable, the utilization factor is required to be less than1. The formulas derived for various measures of the system also indicate this premise.

Prof. N.S.Nilakantan

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QUANTITAIVE ANALYSIS OF HEDGE FUNDS

Hedge Funds:
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns. Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year. Some investment strategies include Global macro, directional, event-driven, relative value (economics), and many others. Hedge funds are generally unsupervised by national regulatory agencies and, on occasion, have been accused of destabilizing various financial markets

Analysis:
Since hedge funds are complex and show asymmetric expected returns, the critical metrics mentioned here are good to start with to rigorously analyze hedge fund performance. Performance Returns: Just like mutual funds, hedge funds must be evaluated for absolute as well as relative return performance. However, since each hedge fund is unique, one must understand the various types of returns to identify them. Absolute returns give an idea as to where to categorize the fund as compared to more traditional types of investments. Hedge funds with low and stable returns will prove to be better substitutes for fixed income than for emerging market equities. Relative returns help determine a fund's attractiveness as compared to other investments on the basis of other hedge funds, mutual funds, etc. The investor must determine the performance over several time periods and the returns should be considered relative to the risk inherent in each investment. The best thing that an investor could do would be to define a list of peers including a cross section of traditional mutual funds, equity or fixed-income indexes and other similar hedge funds. A good fund performs in the top quartiles for each period.

Risk: Outsized returns can be generated only by taking risks, so although a fund may exhibit excellent returns, an investor should incorporate risk into the analysis to determine the risk-adjusted performance of the fund.

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The factors used to measure risk are as follows: Standard Deviation - This is easy to calculate and the concept of a normal distribution of returns is also simple. However, this is also the reason why the inherent risks in hedge funds cant be described. Most hedge funds do not have symmetrical returns, and the standard-deviation can also fail to show the higher than expected chance of a large loss. Value At Risk (VAR) -Value at risk is based on a combination of mean and standard deviation. Unlike standard deviation, it does not describe risk in terms of volatility, but rather as the highest amount that is likely to be lost with a 5% probability. In a normal distribution, it is represented by the leftmost 5% of probable results. Skewness - Skewness is a measure of the asymmetry of returns. Figure 1 shows graphs with the same means and standard deviations. The left one is positively skewed. Although this indicates a higher probability of a result that is less than the mean, it also indicates the probability, although low, of an extremely positive result, indicated by the long tail on the right side.

0 skewness indicates a normal distribution. A positive skewness would be like the distribution on the left, while a negative skewness would be like the one on the right. The risk of a negatively skewed distribution is the probability of a very negative result. Kurtosis It measures the level of flatness of a distribution. In Figure 2, the distribution on the left represents negative kurtosis, which means there is a lower probability of results around the mean, and lower probability of extreme values. On the other hand, a positive kurtosis represents a higher probability of results near the mean, but also a higher probability of extreme values.

Sharpe Ratio: It indicates the amount of additional return obtained for each level of risk taken. A ratio below 1 can be judged based on the asset class or investment strategy used. Sharpe rations prove to be more useful during periods of low interest since the parameters used to calculate it are the mean, standard deviation, and the risk free rate.

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Benchmark Ratios. There are several measures that can be applied to measure performance relative to a benchmark; 3 common measures are beta, correlation, and alpha. Beta - Beta or systematic risk is the measure of a fund's returns relative to the returns on an index. A market or index being compared is assigned a beta value of 1. The value of beta determines how much equity exposure a fund has and this allows an investor to determine if and/or how large an allocation to a fund is warranted. Correlation: It measures any relative changes in returns. However, unlike beta, which assumes that the market drives the performance of a fund to some extent, correlation measures how related the returns of two funds are. It is measured on a scale of -1 to +1, where -1 stands for a perfect negative correlation, 0 for no apparent correlation, and +1 for a perfect positive correlation. The lower the correlation that funds have to each other, the more likely the portfolio is to be well diversified. Alpha - It considers the difference in returns relative to the amount of risk taken. In other words, if the returns are 25% better than the benchmark, but the risk taken was 40% greater than the benchmark, alpha would actually be negative. Since this is what most hedge fund managers claim to add to returns, it is important to understand how to analyze it. Alpha is calculated using the CAPM model:

Expected Return = Risk Free Rate + Beta*(Expected Return of the Market Risk Free Rate) To calculate whether a hedge fund manager added alpha or not, one could just substitute the beta value of the hedge fund in the above equation, which would give an expected return on the hedge fund's performance. If the actual returns exceed the expected return, the hedge fund manager has added alpha based on the risk taken. If the actual return is lower than the expected return, then he/she hasnt added alpha. We, as investors, would want hedge fund managers that add alpha to returns with the risk they take and not generate returns simply by taking additional risk.

Briji Komban PGDM-B 2011-2013

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QUANT ofGURU of the MONTH QUANT GURU the MONTH

Paul Pierre Levy was a Jewish French mathematician who was active especially in probability theory, introducing martingales and Levy flights. Levy processes, Levy measures, Levys constant, the Levy distribution, the Levy skew alpha-stable distribution, the Levy area, the Levy arcsine law, and the fractal Levy C curve are also named after him. Levy was born in Paris, the son of Lucien Levy, an Examiner at the cole Polytechnique. Levy also attended the cole Polytechnique and published his first paper in 1905 at the age of 19, while still an undergraduate. His teacher and advisor was Jacques Hadamard. It was Hadamard who was the major influence in determining the topics on which Lvy would undertake research. Finishing his studies at the cole des Mines in 1910 he began research in functional analysis. His thesis on this topic was examined by mile Picard, Poincare and Hadamard in 1911 and he received his Docteur s Sciences in 1912. Lvy became professor cole des Mines in Paris in 1913, then professor of analysis at the cole Polytechnique in Paris in 1920 where he remained until he retired in 1959. During World War I Lvy served in the artillery and was involved in using his mathematical skills in solving problems concerning defence against attacks from the air. In 1919 Lvy was asked to give three lectures at the cole Polytechnique on calculus of probabilities and the role of Gaussian law in the theory of errors. Not only did Lvy contribute to probability and functional analysis but he also worked on partial differential equations and series. In 1926 he extended Laplace transforms to broader function classes. He undertook a large-scale work on generalised differential equations in functional derivatives. He also studied geometry.

15 September 1886 15 December 1971

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TRIVIA

14 is the smallest even number n with no solutions to (m) =n

HARSHITA SRIVASTAV PGDM-A 2011-2013

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Event of the month: E-TAMBOLA

E-Tambola, an annual game which is a mix of acumen and luck or chance. It was conducted by Quantinuum committee on 21st and 22nd of September. The event was like a housie game where tickets were sold to the participants where they need to strike out the numbers on the tickets. Though it is an interesting game but Quantinuum added logic into it by putting questions for every number on the tickets. Total number of tickets sold for the event was 250 which included participation from various specializations. The game was conducted in two phases. The first phase was an online quiz on 21st where the participants were sent online questions on their mail id and their answers in form of numbers were required to be struck out from the tickets. Here we found two winners for the category Early 5 & Top 10. Next phase was conducted on 22nd,in which the participants were asked to come with their tickets for the main event. The questions were given on the spot and the participants were required to solve and strike off the answers which matched with the numbers on their tickets. The event itself was a good mix of logic, knowledge and Luck. Following were the winners in various categories:Garima Sekhri -Early 5 Shivani Bathla -First line Briji Komban -Middle line Ankur Arora -Bottom line Ankur Arora -Top 10 Shivani Bathla -Full housie-1st Pradyumna Swain -Full Housie-2nd Ankur Arora -Full Housie-3rd Karan Thakur -Full Housie-4th (Combined) Dhwani Shah -Full Housie-4th (Combined)

The event also leads to the launch of quantinuum website which has been prepared by the quantinuum members. The website recorded 250 hits on the first day of its launch. This website will be act as a platform for sharing views related to the Quants and its application in everyday life. The website will feature SIMSR alumni and also updates on various events. The website was launched by Prof. Nilakantan along with the students of the committee. Link for the website: http://quantinuum.weebly.com/

Gunjan Jadon PGDM-B 2011-2013

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FUN FACTS: Quants in a lighter vein

An interesting fact about primes Mathematicians of XVIIIth century proved that numbers 31; 331; 3331; 33331; 333331; 3333331; 33333331 are primes. It was a big temptation to think that all numbers of such kind are primes. But the next number is not a prime. 333333331 = 17 * 19607843

-1
An elegant proof that It is obvious that 1 = (2 -1).

* (2-1)

= (1 + 2 + 22 + ... + 2n) * (2 -1) = (2 + 22 + 23 ... + 2n+1) - (1 + 2 + 22 + ... + 2n) = 2n+1 - 1.

Manisha Agarwal PGDM-FS 2011-2013

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QUANT QUERY OF THE MONTH

QUANT TRIVIA

The Five Most Important Numbers in Mathemati cs in One Equation

e^i*pi + 1 = 0

Answers and name of solvers will be published in the next issue. Mail your answers to simsr.quantinuum@gmail.com
Solutions to Last Months QUANT QUERY What no. is two places away from itself plus 3, three places away from itself doubled, two places away from itself minus 2, two places away from itself plus 4, two places away from itself minus 1 and two places away from itself plus 6. Ans 5 (Fourth row, third number)
25 8 19 9 14 13 24 6 15 20 10 11 21 1 12 7 18 16 17 4 5 3 2

5
22

Solutions to Last Months SUDOKU

No correct entry was received for the above questions.

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Quantinuum@SIMSR
Quantinuum, the Quant's forum of KJ Somaiya Institute of Management Studies and Research is formed with two objectives. Firstly to remove the common myth from the students mind that mathematics is difficult. Secondly to give students an exposure on how to make decisions in real life business problems using quantitative techniques. This helps to bridge the gap between theory and the practical application. For any further queries and feedback, please contact the following address KJ Somaiya Institute of Management Studies and Research Vidya Nagar, Vidya Vihar Ghatkopar East Mumbai -400077 Mentors Prof. N.S.Nilakantan (9820680741) email nilakantan@simsr.somaiya.edu Prof. Anjali Chopra ( 9820495195) - email anjalic99@gmail.com Leaders Gaurav Agarwal (7738543891) Dhaval Trivedi (9224422442) Pramit Pratim Ghosh (7738543880) Tarun Sethi (9820388158 ) Editorial Team Vaibhav Goel (9769456493) Satyadev Kalra (8291687568) Harshita Shrivastav(9769552083) Manisha Agarwal(9372166242) For more details: http://quantinuum.weebly.com/

http://simsrquantinuum.blogspot.com/

Like our newsletter? Want to contribute and see your name being published? Feel free to contribute articles, concepts, trivia, facts and news about the wonderful world of numbers and mail them to simsr.quantinuum@gmail.com