In this chapter, we will discuss basic concepts and several widely used functions related to Python. This chapter plus the next one (Chapter 2, Introduction to Python Modules) are only the chapters exclusively based on Python techniques. Those two chapters serve as a review for readers who have some basic Python knowledge. There is no way that a beginner, with no prior Python knowledge, could master Python by reading just those two chapters. For a new learner who wants to learn Python in more detail, he/she could find many good books. From Chapter 3, Time Value of Money onward, we will use Python, which will help in explaining or demonstrating various finance concepts, running regression, and processing data related to economics, finance, and accounting. Because of this, we will offer more Pythonrelated techniques and usages in each of the upcoming chapters.
In particular, in this chapter, we will discuss the following topics:
Python installation
Variable assignment, empty space, and writing our own programs
Writing a Python function
Data input
Data manipulation
Data output
In this section, we will discuss how to install Python. More specifically, we will discuss two methods: installing Python via Anaconda and installing Python directly.
There are several reasons why the first method is preferred:
First, we can use a Python editor called Spyder, which is quite convenient for writing and editing our Python programs. For example, it has several windows (panels): one for the console, where we can type our commands directly; one for the program editor, where we can write and edit our programs; one for Variable Explorer,where we can view our variables and their values; and one for help, where we can seek help.
Second, different colors for codes or comment lines will help us avoid some obvious typos and mistakes.
Third, when installing Anaconda, many modules are installed simultaneously. A module is a set of programs written by experts, professionals, or any person around a specific topic. It could be viewed as a toolbox for a specific task. To speed up the process of developing new tools, a new module usually depends on the functions embedded in other, already developed modules. This is called module dependency. One disadvantage of such a module dependency is how to install them at the same time. For more information about this, see Chapter 2, Introduction to Python Modules.
We could install Python in several ways. The consequence is that we will have different environments for writing a Python program and running a Python program.
The following is a simple twostep approach. First, we go to http://continuum.io/downloads and find an appropriate package; see the following screenshot:
For Python, different versions coexist. From the preceding screenshot, we see that there exist two versions, 3.5 and 2.7.
For this book, the version is not that critical. The old version had fewer problems while the new one usually has new improvements. Again, module dependency could be a big headache; see Chapter 2, Introduction to Python Modules for more detail. The version of Anaconda is 4.2.0. Since we will launch Python through Spyder, it might have different versions as well.
After Python is installed via Anaconda, we can navigate to Start (for a Windows version) All Programs Anaconda3(32bit), as shown in the following screenshot:
After we click Spyder, the last entry in the preceding screenshot, we will see the following four panels:
The topleft panel (window) is our program editor, where we write our programs. The bottomright panel is the IPython console, where we cantype our simple commands. IPython is the default one. To know more about IPython, just type a question mark; see the following screenshot:
Alternatively, we could launch Python console by clicking Consoles on the menu bar and then Open a Python console. After that, the following window will appear:
From the image with four panels, the topright panel is our help window, where we can seek help. The middle one is called Variable Explorer, where the names of variables and their values are shown. Depending on personal preference, users will scale those panels or reorganize them.
For most users, knowing how to install Python via Anaconda is more than enough. Just for completeness, here the second way to install Python is presented.
The following steps are involved:
First, go to www.python.org/download:
Depending on your computer, choose the appropriate package, for example, Python version 3.5.2. For this book, the version of Python is not important. At this stage, a new user could just install Python with the latest version. After installation, we will see the following entries for a Windows version:
To launch Python, we could click
IDLE (Python 3.5. 32 bit)
and get to see the following screen:From the IPython shown in the screenshot with four panels, or from the Python console panel or from the previous screenshot showing Python Shell, we could type various commands, as shown here:
>>>pv=100 >>>pv*(1+0.1)**20 672.7499949325611 >>> import math >>>math.sqrt(3) 1.7320508075688772 >>>
To write a Python program, we click File, then New File:
Click Run, then Run module. If no error occurs, we can use the function just like other embedded functions, as shown here:
First, for Python language, an empty space or spaces is very important. For example, if we accidently have a space before typing pv=100
, we will see the following error message:
The name of the error is called IndentationError
. The reason is that, for Python, indentation is important. Later in the chapter, we will learn that a proper indentation will regulate/define how we write a function or why a group of codes belongs to a specific topic, function, or loop.
Assume that we deposit $100 in the bank today. What will be the value 3 years later if the bank offers us an annual deposit rate of 1.5%? The related codes is shown here:
>>>pv=100 >>>pv 100 >>>pv*(1+0.015)**3 104.56783749999997 >>>
In the preceding codes, **
means a power function. For example, 2**3
has a value of 8
. To view the value of a variable, we simply type its name; see the previous example. The formula used is given here:
Here, FV is the future value, PV is the present value, R is the period deposit rate while n is the number of periods. In this case, R is the annual rate of 0.015 while n is 3. At the moment, readers should focus on simple Python concepts and operations.
In Chapter 3, Time Value of Money, this formula will be explained in detail. Since Python is casesensitive, an error message will pop up if we type PV
instead of pv
; see the following code:
>>>PV NameError: name 'PV' is not defined >>>Traceback (most recent call last): File "<stdin>", line 1, in <module>
Unlike some languages, such as C and FORTRAN, for Python a new variable does not need to be defined before a value is assigned to it. To show all variables or function, we use the dir()
function:
>>>dir() ['__builtins__', '__doc__', '__loader__', '__name__', '__package__', '__spec__', 'pv'] >>>
To find out all builtin functions, we type dir(__builtings__)
. The output is shown here:
Assume that we are interested in writing a Python function for equation (1).
After launching Spyder, click File, then New File. We write the following two lines, as shown in the left panel. The keyword def
is for function,fv_f
is the function name, and the three values of pv
, r
, and n
in the pair of parentheses are input variables.
The colon (:
) indicates the function hasn't finished yet. After we hit the Enter key, the next line will be automatically indented.
After we enter return pv*(1+r)**n
and hit the Enter key twice, this simple program is completed. Obviously, for the second line, **
represents a power function.
Assume that we save it under c:/temp/temp.py
:
To run or debug the program, click the arrow key under Run on the menu bar; see the preceding topright image. The compiling result is shown by the bottom image right (the second image on top right). Now, we can use this function easily by calling it with three input values:
>>>fv_f(100,0.1,2) 121.00000000000001 >>>fv_f(100,0.02,20) 148.59473959783548
If some comments are added by explaining the meanings of input variables, the formula used, plus a few examples, it will be extremely helpful for other users or programmers. Check the following program with comments:
def pv_f(fv,r,n): """Objective: estimate present value fv formula : pv= (1+r)^n fv: fture value r : discount periodic rate n : number of periods Example #1 >>>pv_f(100,0.1,1) 90.9090909090909 Example #2: >>>pv_f(r=0.1,fv=100,n=1) 90.9090909090909 """ return fv/(1+r)**n
The comments or explanations are included in a pair of three double quotation marks ("""
and """
). The indentation within a comment is not consequential. When compiling, the underlying software will ignore all comments. The beauty of those comments is that we can use help(pv_f)
to see them, as illustrated here:
In Chapter 2, Introduction to Python Modules, we will show how to upload a financial calculator written in Python, and in Chapter 3, Time Value of Money, we will explain how to generate such a financial calculator.
In this section, we discuss a very important concept: loop or loops. A loop is used to repeat the same task with slightly different input or other factors.
Let's look at a simple loop through all the data items in an array:
>>>import numpy as np >>>cashFlows=np.array([100,50,40,30]) >>>for cash in cashFlows: ... print(cash) ... 100 50 40 30
One type of data is called a tuple, where we use a pair of parentheses, ()
, to include all input values. One feature of a tuple variable is that we cannot modify its value. This special property could be valuable if some our variables should never be changed.A tuple is different from a dictionary, which stores data with keyvalue pairs. It is not ordered and it requires that the keys are hashable. Unlike a tuple, the value for a dictionary can be modified.
Note that for Python, the subscription for a vector or tuple starts from 0
. If x
has a length of 3
, the subscriptions will be 0
, 1
and 2
:
>>> x=[1,2,3] >>>x[0]=2 >>>x >>> [2, 2, 3] >>> y=(7,8,9) >>>y[0]=10 >>> TypeError: 'tuple' object does not support item assignment >>>Traceback (most recent call last): File "<stdin>", line 1, in <module> >>>type(x) >>> <class'list'> >>>type(y) >>> <class'tuple'> >>>
Assuming that we invest $100 today and $30 next year, the future cash inflow will be $10, $40, $50, $45, and $20 at the end of each year for the next 5 years, starting at the end of the second year; see the following timeline and its corresponding cash flows:
100 30 10 40 50 45 20  0 1 2 3 4 5 6
What is the Net Present Value (NPV) if the discount rate is 3.5%? NPVis defined as the present values of all benefits minus the present values of all costs. If a cash inflow has a positive sign while a cash outflow has a negative sign, then NPV can be defined conveniently as the summation of the present values of all cash flows. The present value of one future value is estimated by applying the following formula:
Here,PV is the present value, FV is the future value,R is the period discount rate and n is the number of periods. In Chapter 3, Time Value of Money, the meaning of this formula will be explained in more detail. At the moment, we just want to write annpv_f()
function which applies the preceding equation n times, where n is the number of cash flows. The complete NPV program is given here:
def npv_f(rate, cashflows): total = 0.0 for i in range(0,len(cashflows)): total += cashflows[i] / (1 + rate)**i return total
In the program, we used a for
loop. Again, the correct indentation is important for Python. Lines from 2 to 5 are all indented by one unit, thus they belong to the same function, called npv_f
. Similarly, line 4 is indented two units, that is, after the second column (:
), it belongs to the for
loop. The command of total +=a
is equivalent to total=total +a
.
For the NPV function, we use a for
loop. Note that the subscription of a vector in Python starts from zero, and the intermediate variable i
starts from zero as well. We could call this function easily by entering two sets of input values. The output is shown here:
>>>r=0.035 >>>cashflows=[100,30,10,40,50,45,20] >>>npv_f(r,cashflows) 14.158224763725372
Here is another npv_f()
function with a function called enumerate()
. This function willgenerate a pair of indices, starting from0
, and its corresponding value:
def npv_f(rate, cashflows): total = 0.0 for i, cashflow in enumerate(cashflows): total += cashflow / (1 + rate)**i return total
Here is an example illustrating the usage of enumerate()
:
x=["a","b","z"] for i, value in enumerate(x): print(i, value)
Unlike the npv_f
function specified previously, the NPV function from Microsoft Excel is actually a PV
function, meaning that it can be applied only to the future values. Its equivalent Python program, which is called npv_Excel
, is shown here:
def npv_Excel(rate, cashflows): total = 0.0 for i, cashflow in enumerate(cashflows): total += cashflow / (1 + rate)**(i+1) return total
The comparisons are shown in the following table. The result from the Python program is shown in the left panel while the result by calling the Excel NPV function is shown in the right panel. Please pay enough attention to the preceding program shown itself and how to call such a function:
By using a loop, we can repeat the same task with different inputs. For example, we plan to print a set of values. The following is such an example for a while
loop:
i=1 while(i<10): print(i) i+=1
The following program will report a discount (or any number of discount rates), making its corresponding NPV equal zero. Assume the cash flow will be 550
, 500
, 500
, 500
, and 1000
at time 0
, at the end of each year of the next 4 years. In Chapter 3, Time Value of Money, we will explain the concept of this exercise in more detail.
Write a Python program to find out which discount rate makes NPV equal zero. Since the direction of cash flows changes twice, we might have two different rates making NPV equal zero:
cashFlows=(550,500,500,500,1000) r=0 while(r<1.0): r+=0.000001 npv=npv_f(r,cashFlows) if(abs(npv)<=0.0001): print(r)
The corresponding output is given here:
0.07163900000005098 0.33673299999790873
Later in the chapter, a for
loop is used to estimate the NPV of a project.
When we need to use a few math functions, we can import the math
module first:
>>>import math >>>dir(math) ['__doc__', '__loader__', '__name__', '__package__', '__spec__', 'acos', 'acosh', 'asin', 'asinh', 'atan', 'atan2', 'atanh', 'ceil', 'copysign', 'cos', 'cosh', 'degrees', 'e', 'erf', 'erfc', 'exp', 'expm1', 'fabs', 'factorial', 'floor', 'fmod', 'frexp', 'fsum', 'gamma', 'gcd', 'hypot', 'inf', 'isclose', 'isfinite', 'isinf', 'isnan', 'ldexp', 'lgamma', 'log', 'log10', 'log1p', 'log2', 'modf', 'nan', 'pi', 'pow', 'radians', 'sin', 'sinh', 'sqrt', 'tan', 'tanh', 'trunc'] >>>math.pi 3.141592653589793 >>>
The sqrt()
, square root, function is contained in the math
module. Thus, to use the sqrt()
function, we need to use math.sqrt()
; see the following code:
>>>sqrt(2) NameError: name 'sqrt' is not defined >>>Traceback (most recent call last): File "<stdin>", line 1, in <module> math.sqrt(2) 1.4142135623730951 >>>
If we want to call those functions directly, we can use from math import *
; see the following code:
>>>from math import * >>>sqrt(3) 1.7320508075688772 >>>
To learn about individual embedded functions, we can use thehelp()
function;see the following code:
>>>help(len) Help on builtin function len in module builtins: len(obj, /) Return the number of items in a container. >>>
Let's generate a very simple input dataset first, as shown here. Its name and location is c:/temp/test.txt
. The format of the dataset is text:
a b 1 2 3 4
The code is shown here:
>>>f=open("c:/temp/test.txt","r") >>>x=f.read() >>>f.close()
The print()
function could be used to show the value of x
:
>>>print(x) a b 1 2 3 4 >>>
For the second example, let's download the daily historical price for IBM from Yahoo!Finance first. To do so, we visit http://finance.yahoo.com:
Enter IBM
to find its related web page. Then click Historical Data, then click Download:
Assume that we save the daily data as ibm.csv
under c:/temp/
. The first five lines are shown here:
Date,Open,High,Low,Close,Volume,Adj Close 20161104,152.399994,153.639999,151.869995,152.429993,2440700,152.429993 20161103,152.509995,153.740005,151.800003,152.369995,2878800,152.369995 20161102,152.479996,153.350006,151.669998,151.949997,3074400,151.949997 20161101,153.50,153.910004,151.740005,152.789993,3191900,152.789993
The first line shows the variable names: date, open price, high price achieved during the trading day, low price achieved during the trading day, close price of the last transaction during the trading day, trading volume, and adjusted price for the trading day. The delimiter is a comma. There are several ways of loading the text file. Some methods are discussed here:
Method I: We could use
read_csv
from thepandas
module:>>> import pandas as pd >>> x=pd.read_csv("c:/temp/ibm.csv") >>>x[1:3] Date Open High Low Close Volume \ 1 20161102 152.479996 153.350006 151.669998 151.949997 3074400 2 20161101 153.500000 153.910004 151.740005 152.789993 3191900 Adj.Close 1 151.949997 2 152.789993>>>
Method II: We could use
read_table
from thepandas
module; see the following code:>>> import pandas as pd >>> x=pd.read_table("c:/temp/ibm.csv",sep=',')
Alternatively, we could download the IBM daily price data directly from Yahoo!Finance; see the following code:
>>> import pandas as pd >>>url=url='http://canisius.edu/~yany/data/ibm.csv' >>> x=pd.read_csv(url) >>>x[1:5] Date Open High Low Close Volume \ 1 20161103 152.509995 153.740005 151.800003 152.369995 2843600 2 20161102 152.479996 153.350006 151.669998 151.949997 3074400 3 20161101 153.500000 153.910004 151.740005 152.789993 3191900 4 20161031 152.759995 154.330002 152.759995 153.690002 3553200 Adj Close 1 152.369995 2 151.949997 3 152.789993 4 153.690002>>>
We could retrieve data from an Excel file by using the ExcelFile()
function from thepandas
module. First, we generate an Excel file with just a few observations; see the following screenshot:
Let's call this Excel file stockReturns.xlxs
and assume that it is saved under c:/temp/
. The Python code is given here:
>>>infile=pd.ExcelFile("c:/temp/stockReturns.xlsx") >>> x=infile.parse("Sheet1") >>>x date returnAreturnB 0 2001 0.10 0.12 1 2002 0.03 0.05 2 2003 0.12 0.15 3 2004 0.20 0.22 >>>
To retrieve Python datasets with an extension of .pkl
or .pickle
, we can use the following code. First, we download the Python dataset called ffMonthly.pkl
from the author's web page at http://www3.canisius.edu/~yany/python/ffMonthly.pkl.
Assume that the dataset is saved under c:/temp/
. The function called read_pickle()
included in the pandas
module can be used to load the dataset with an extension of .pkl
or .pickle
:
>>> import pandas as pd >>> x=pd.read_pickle("c:/temp/ffMonthly.pkl") >>>x[1:3] >>> Mkt_RfSMBHMLRf 196308 0.0507 0.0085 0.0163 0.0042 196309 0.0157 0.0050 0.0019 0.0080 >>>
The following is the simplest if
function: when our interest rate is negative, print a warning message:
if(r<0): print("interest rate is less than zero")
Conditions related to logical AND
and OR
are shown here:
>>>if(a>0 and b>0): print("both positive") >>>if(a>0 or b>0): print("at least one is positive")
For the multiple if...elif
conditions, the following program illustrates its application by converting a number grade to a letter grade:
grade=74 if grade>=90: print('A') elif grade >=85: print('A') elif grade >=80: print('B+') elif grade >=75: print('B') elif grade >=70: print('B') elif grade>=65: print('C+') else: print('D')
Note that it is a good idea for such multiple if...elif
functions to end with an else
condition since we know exactly what the result is if none of those conditions are met.
There are many different types of data, such as integer, real number, or string. The following table offers a list of those data types:
Data types 
Description 


Boolean ( 

Platform integer (normally either 

Byte ( 

Integer ( 

Integer ( 

Integer ( 

Unsigned integer ( 

Unsigned integer ( 

Unsigned integer ( 

Unsigned integer ( 

Short and for 

Single precision float: sign 

52 bits mantissa 

Shorthand for 

Complex number; represented by two 32bit floats (real and imaginary components) 

Complex number; represented by two 64bit floats (real and imaginary components) 
Table 1.1 List of different data types
In the following examples, we assign a value to r
, which is a scalar, and several values to pv
, which is an array (vector).The type()
function is used to show their types:
>>> import numpy as np >>> r=0.023 >>>pv=np.array([100,300,500]) >>>type(r) <class'float'> >>>type(pv) <class'numpy.ndarray'>
To choose the appropriate decision, we use the round()
function; see the following example:
>>> 7/3 2.3333333333333335 >>>round(7/3,5) 2.33333 >>>
For data manipulation, let's look at some simple operations:
>>>import numpy as np >>>a=np.zeros(10) # array with 10 zeros >>>b=np.zeros((3,2),dtype=float) # 3 by 2 with zeros >>>c=np.ones((4,3),float) # 4 by 3 with all ones >>>d=np.array(range(10),float) # 0,1, 2,3 .. up to 9 >>>e1=np.identity(4) # identity 4 by 4 matrix >>>e2=np.eye(4) # same as above >>>e3=np.eye(4,k=1) # 1 start from k >>>f=np.arange(1,20,3,float) # from 1 to 19 interval 3 >>>g=np.array([[2,2,2],[3,3,3]]) # 2 by 3 >>>h=np.zeros_like(g) # all zeros >>>i=np.ones_like(g) # all ones
Some socalled dot
functions are quite handy and useful:
>>> import numpy as np >>> x=np.array([10,20,30]) >>>x.sum() 60
Anything after the number sign of #
will be a comment. Arrays are another important data type:
>>>import numpy as np >>>x=np.array([[1,2],[5,6],[7,9]]) # a 3 by 2 array >>>y=x.flatten() >>>x2=np.reshape(y,[2,3] ) # a 2 by 3 array
We could assign a string to a variable:
>>> t="This is great" >>>t.upper() 'THIS IS GREAT' >>>
To find out all stringrelated functions, we use dir('')
; see the following code:
>>>dir('') ['__add__', '__class__', '__contains__', '__delattr__', '__dir__', '__doc__', '__eq__', '__format__', '__ge__', '__getattribute__', '__getitem__', '__getnewargs__', '__gt__', '__hash__', '__init__', '__iter__', '__le__', '__len__', '__lt__', '__mod__', '__mul__', '__ne__', '__new__', '__reduce__', '__reduce_ex__', '__repr__', '__rmod__', '__rmul__', '__setattr__', '__sizeof__', '__str__', '__subclasshook__', 'capitalize', 'casefold', 'center', 'count', 'encode', 'endswith', 'expandtabs', 'find', 'format', 'format_map', 'index', 'isalnum', 'isalpha', 'isdecimal', 'isdigit', 'isidentifier', 'islower', 'isnumeric', 'isprintable', 'isspace', 'istitle', 'isupper', 'join', 'ljust', 'lower', 'lstrip', 'maketrans', 'partition', 'replace', 'rfind', 'rindex', 'rjust', 'rpartition', 'rsplit', 'rstrip', 'split', 'splitlines', 'startswith', 'strip', 'swapcase', 'title', 'translate', 'upper', 'zfill'] >>>
For example, from the preceding list we see a function called split
. After typinghelp(''.split)
, we will have related help information:
>>>help(''.split) Help on builtin function split: split(...) method of builtins.str instance S.split(sep=None, maxsplit=1) > list of strings Return a list of the words in S, using sep as the delimiter string. If maxsplit is given, at most maxsplit splits are done. If sep is not specified or is None, any whitespace string is a separator and empty strings are removed from the result. >>>
We could try the following example:
>>> x="this is great" >>>x.split() ['this', 'is', 'great'] >>>
Matrix manipulation is important when we deal with various matrices:
The condition for equation (3) is that matrices A and B should have the same dimensions. For the product of two matrices, we have the following equation:
Here,A is an n by k matrix (n rows and k columns), while B is a k by m matrix. Remember that the second dimension of the first matrix should be the same as the first dimension of the second matrix. In this case, it is k. If we assume that the individual data items in C, A, and B are Ci,j (the ith row and the jth column), Ai,j, and Bi,j, we have the following relationship between them:
The dot()
function from the NumPy module could be used to carry the preceding matrix multiplication:
>>>a=np.array([[1,2,3],[4,5,6]],float) # 2 by 3 >>>b=np.array([[1,2],[3,3],[4,5]],float) # 3 by 2 >>>np.dot(a,b) # 2 by 2 >>>print(np.dot(a,b)) array([[ 19., 23.], [ 43., 53.]]) >>>
We could manually calculate c(1,1): 1*1 + 2*3 + 3*4=19.
After retrieving data or downloading data from the internet, we need to process it. Such a skill to process various types of raw data is vital to finance students and to professionals working in the finance industry. Here we will see how to download price data and then estimate returns.
Assume that we have n values of x1, x2, â€¦ and xn. There exist two types of means: arithmetic mean and geometric mean; see their genetic definitions here:
Assume that there exist three values of 2
,3
, and 4
. Their arithmetic and geometric means are calculated here:
>>>(2+3+4)/3. >>>3.0 >>>geo_mean=(2*3*4)**(1./3) >>>round(geo_mean,4) 2.8845
For returns, the arithmetic mean's definition remains the same, while the geometric mean of returns is defined differently; see the following equations:
In Chapter 3, Time Value of Money, we will discuss both means again.
We could say that NumPy is a basic module while SciPy is a more advanced one. NumPy tries to retain all features supported by either of its predecessors, while most new features belong in SciPy rather than NumPy. On the other hand, NumPy and SciPy have many overlapping features in terms of functions for finance. For those two types of definitions, see the following example:
>>> import scipy as sp >>> ret=sp.array([0.1,0.05,0.02]) >>>sp.mean(ret) 0.043333333333333342 >>>pow(sp.prod(ret+1),1./len(ret))1 0.042163887067679262
Our second example is related to processing theFamaFrench 3 factor time series. Since this example is more complex than the previous one, if a user feels it is difficult to understand, he/she could simply skip this example. First, a ZIP file called FF_Research_Data_Factor_TXT.zip
could be downloaded from Prof. French's Data Library. After unzipping and removing the first few lines and annual datasets, we will have a monthly FamaFrench factor time series. The first few lines and last few lines are shown here:
DATE MKT_RFSMBHMLRF 192607 2.96 2.30 2.87 0.22 192608 2.64 1.40 4.19 0.25 192609 0.36 1.32 0.01 0.23 201607 3.95 2.90 0.98 0.02 201608 0.49 0.94 3.18 0.02 201609 0.25 2.00 1.34 0.02
Assume that the final file is called ffMonthly.txt
under c:/temp/
. The following program is used to retrieve and process the data:
import numpy as np import pandas as pd file=open("c:/temp/ffMonthly.txt","r") data=file.readlines() f=[] index=[] for i in range(1,np.size(data)): t=data[i].split() index.append(int(t[0])) for j in range(1,5): k=float(t[j]) f.append(k/100) n=len(f) f1=np.reshape(f,[n/4,4]) ff=pd.DataFrame(f1,index=index,columns=['Mkt_Rf','SMB','HML','Rf'])
To view the first and last few observations for the dataset called ff
, the functions of .head()
and .tail()
can be used:
The simplest example is given here:
>>>f=open("c:/temp/out.txt","w") >>>x="This is great" >>>f.write(x) >>>f.close()
For the next example, we download historical stock price data first, then write data to an output file:
import re from matplotlib.finance import quotes_historical_yahoo_ochl ticker='dell' outfile=open("c:/temp/dell.txt","w") begdate=(2013,1,1) enddate=(2016,11,9) p=quotes_historical_yahoo_ochl (ticker,begdate,enddate,asobject=True,adjusted=True) outfile.write(str(p)) outfile.close()
To retrieve the file, we have the following code:
>>>infile=open("c:/temp/dell.txt","r") >>>x=infile.read()
One issue is that the preceding saved text file contains many unnecessary characters, such as [
and]
. We could apply a substitution function called sub()
contained in the Python module;see the simplest example given here:
>>> import re >>>re.sub("a","9","abc") >>> '9bc' >>>
In the preceding example, we will replace the letter a
with9
. Interested readers could try the following two lines of code for the preceding program:
p2= re.sub('[\(\)\{\}\.<>azAZ]','', p) outfile.write(p2)
It is a good idea to generate Python datasets with an extension of .pickle
since we can retrieve such data quite efficiently. The following is the complete Python code to generate ffMonthly.pickle
. Here, we show how to download price data and then estimate returns:
import numpy as np import pandas as pd file=open("c:/temp/ffMonthly.txt","r") data=file.readlines() f=[] index=[] for i in range(1,np.size(data)): t=data[i].split() index.append(int(t[0])) for j in range(1,5): k=float(t[j]) f.append(k/100) n=len(f) f1=np.reshape(f,[n/4,4]) ff=pd.DataFrame(f1,index=index,columns=['Mkt_Rf','SMB','HML','Rf']) ff.to_pickle("c:/temp/ffMonthly.pickle")
Where can you download and install Python?
Is Python casesensitive?
How do you assign a set of values to pv in the format of a tuple. Could we change its values after the assignment?
Estimate the area of a circle if the diameter is 9.7 using Python.
How do you assign a value to a new variable?
How can you find some sample examples related to Python?
How do you launch Python's help function?
How can you find out more information about a specific function, such as
print()
?What is the definition of builtin functions?
Is
pow()
a builtin function? How do we use it?How do we find all builtin functions? How many builtin functions are present?
When we estimate the square root of 3, which Python function should we use?
Assume that the present value of a perpetuity is $124 and the annual cash flow is $50; what is the corresponding discount rate? The formula is given here:
Based on the solution of the previous question, what is the corresponding quarterly rate?
For a perpetuity, the same cash flow happens at the same interval forever. A growing perpetuity is defined as follows: the future cash flow is increased at a constant growth rate forever. If the first cash flow happens at the end of the first period, we have the following formula:
Here PV is the present value, C is the cash flow of the next period, g is a growth rate, and R is the discount rate. If the first cash flow is $12.50, the constant growth rate is 2.5 percent, and the discount rate is 8.5 percent. What is the present value of this growing perpetuity?
For an nday variance, we have the following formula:
Here is the daily variance and is is the daily standard deviation (volatility). If the volatility (daily standard deviation) of a stock is 0.2, what is its 10day volatility?
We expect to have $25,000 in 5 years. If the annual deposit rate is 4.5 percent, how much do we have to deposit today?
The substitution function called
sub()
is from a Python module. Find out how many functions are contained in that module.Write a Python program to convert the standard deviation estimated based on daily data or monthly data to an annual one by using the following formulas:
The Sharpe ratio is a measure of tradeoff between benefit (excess return) and cost (total risk) for an investment such as a portfolio. Write a Python program to estimate the Sharpe ratio by applying the following formula:
Here is the portfolio mean return, is the mean riskfree rate and Ïƒ is the risk of the portfolio. Again, at this moment, it is perfectly fine that a reader does not understand the economic meaning of this ratio since the Sharpe ratio will be discussed in more detail in Chapter 7, Multifactor Models and Performance Measures.
In this chapter, many basic concepts and several widely used functions related to Python werediscussed. In Chapter 2, Introduction to Python Modules, we will discuss a key component of the Python language: Python modules and theirrelated issues. A module is a set of programs written by experts, professionals, or any person around a specific topic. A module could be viewed as a toolbox for a specific task. The chapter willfocus on the five most important modules: NumPy, SciPy, matplotlib
, statsmodels
, and pandas
.