McKinney Chapter 5 - Practice - Sec 04

FINA 6333 for Spring 2025

Author

Richard Herron 

import matplotlib.pyplot as plt
import numpy as np
import pandas as pd
import yfinance as yf
%precision 4
pd.options.display.float_format = '{:.4f}'.format
# %config InlineBackend.figure_format = 'retina'

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Five-Minute Review

The pandas package makes it easy to manipulate panel data and we will use it all semester. Its name is an abbreviation of panel data:

In statistics and econometrics, panel data and longitudinal data[1][2] are both multi-dimensional data involving measurements over time. Panel data is a subset of longitudinal data where observations are for the same subjects each time.

We will download some financial data from Yahoo! Finance to cover three important tools in pandas.

First, we can use the yfinance package to easily download stock data from Yahoo! Finance.

Note

Starting with version 0.2.51, the yfinance package changed the default behavior of the auto_adjust argument from False to True. By default, the yf.download() function now returns adjusted prices, without including the Adj Close column.

We prefer to work with raw data from Yahoo! Finance and explicitly calculate returns using the Adj Close column. Therefore, we will set auto_adjust=False in our yf.download() calls. See the yfinance changelog for release version 0.2.51.

Also, I will use the progress=False argument to improve the readability of the PDF and website I render from these notebooks.

df0 = yf.download(tickers='AAPL MSFT', auto_adjust=False, progress=False)
df0
Price Adj Close Close High Low Open Volume
Ticker AAPL MSFT AAPL MSFT AAPL MSFT AAPL MSFT AAPL MSFT AAPL MSFT
Date
1980-12-12 0.0987 NaN 0.1283 NaN 0.1289 NaN 0.1283 NaN 0.1283 NaN 469033600 NaN
1980-12-15 0.0936 NaN 0.1217 NaN 0.1222 NaN 0.1217 NaN 0.1222 NaN 175884800 NaN
1980-12-16 0.0867 NaN 0.1127 NaN 0.1133 NaN 0.1127 NaN 0.1133 NaN 105728000 NaN
1980-12-17 0.0889 NaN 0.1155 NaN 0.1161 NaN 0.1155 NaN 0.1155 NaN 86441600 NaN
1980-12-18 0.0914 NaN 0.1189 NaN 0.1194 NaN 0.1189 NaN 0.1189 NaN 73449600 NaN
... ... ... ... ... ... ... ... ... ... ... ... ...
2025-02-24 247.1000 404.0000 247.1000 404.0000 248.8600 409.3700 244.4200 399.3200 244.9300 408.5100 51326400 26443700.0000
2025-02-25 247.0400 397.9000 247.0400 397.9000 250.0000 401.9200 244.9100 396.7000 248.0000 401.1000 48013300 29387400.0000
2025-02-26 240.3600 399.7300 240.3600 399.7300 244.9800 403.6000 239.1300 394.2500 244.3300 398.0100 44433600 19619000.0000
2025-02-27 237.3000 392.5300 237.3000 392.5300 242.4600 405.7400 237.0600 392.1700 239.4100 401.2700 41153600 21127400.0000
2025-02-28 241.8400 396.9900 241.8400 396.9900 242.0900 397.6300 230.2000 386.5700 236.9500 392.6600 56796200 32826500.0000

11144 rows × 12 columns

Second, we can slice rows and columns two ways: by integer locations with .iloc[] and by labels with .loc[]

df0.iloc[:6, :6]
Price Adj Close Close High
Ticker AAPL MSFT AAPL MSFT AAPL MSFT
Date
1980-12-12 0.0987 NaN 0.1283 NaN 0.1289 NaN
1980-12-15 0.0936 NaN 0.1217 NaN 0.1222 NaN
1980-12-16 0.0867 NaN 0.1127 NaN 0.1133 NaN
1980-12-17 0.0889 NaN 0.1155 NaN 0.1161 NaN
1980-12-18 0.0914 NaN 0.1189 NaN 0.1194 NaN
1980-12-19 0.0970 NaN 0.1261 NaN 0.1267 NaN 
df0.loc[:'1980-12-19', :'High']
Price Adj Close Close High
Ticker AAPL MSFT AAPL MSFT AAPL MSFT
Date
1980-12-12 0.0987 NaN 0.1283 NaN 0.1289 NaN
1980-12-15 0.0936 NaN 0.1217 NaN 0.1222 NaN
1980-12-16 0.0867 NaN 0.1127 NaN 0.1133 NaN
1980-12-17 0.0889 NaN 0.1155 NaN 0.1161 NaN
1980-12-18 0.0914 NaN 0.1189 NaN 0.1194 NaN
1980-12-19 0.0970 NaN 0.1261 NaN 0.1267 NaN
Note

To slice a DataFrame:

  • Use ['Name'] to select specific columns by their names.
  • Use .loc[] to slice rows, or rows and columns together, with labels or conditional expressions.
df0['High']
Ticker AAPL MSFT
Date
1980-12-12 0.1289 NaN
1980-12-15 0.1222 NaN
1980-12-16 0.1133 NaN
1980-12-17 0.1161 NaN
1980-12-18 0.1194 NaN
... ... ...
2025-02-24 248.8600 409.3700
2025-02-25 250.0000 401.9200
2025-02-26 244.9800 403.6000
2025-02-27 242.4600 405.7400
2025-02-28 242.0900 397.6300

11144 rows × 2 columns

# # KeyError: '1980-12-12'
# df0['1980-12-12']

Note, if we use string labels, like dates and words, pandas includes left and right edges! This string label behavior differs from the integer location behavior everywhere else in Python. However, it is easy to figure out the sequence of integer locations. It is difficult to figure our the sequence of string labels.

Third, there many methods we can apply to pandas objects (and chain)! At this point in the course, our most common methods will be:

  1. .pct_change() to calculate simple returns from adjusted close prices
  2. .plot() to quickly plot pandas objects
  3. .mean(), .std(), .describe(), etc. to calculate summary statistics
(
    df0  # DataFrame containing AAPL and MSFT data from 1980-12-12 through today
    .loc['1990':'2024', 'Adj Close']  # Slice rows for 1990-2024 (inclusive) and the 'Adj Close' column
    .pct_change()  # Calculate daily percentage changes in 'Adj Close' (includes dividends and splits)
    .add(1)  # Prepare for compounding by adding 1 to daily returns
    .cumprod()  # Compute cumulative product to get total return for each day since the start
    .sub(1)  # Convert back to cumulative returns
    .plot()  # Plot cumulative returns
)

The plot above is in decimal returns! pandas makes it easy to generate plots, but getting them beautiful and readable takes more work. The following code adds a title, labels, and formats the y axis.

from matplotlib.ticker import FuncFormatter

# Plot the data
ax = df0.loc['1990':'2024', 'Adj Close'].pct_change().add(1).cumprod().sub(1).plot()

# Format y-axis as percentages with comma separators
ax.yaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

# Add labels and title if needed
plt.ylabel('Cumulative Return (%)')
plt.title('Cumulative Returns from 1990 to 2024')

# Show the plot and suppress text output (<Axes: xlabel='Date'> above)
plt.show()

Practice

What are the mean daily returns for these four stocks?

tickers = 'AAPL IBM MSFT GOOG'
returns = (
    yf.download(tickers=tickers, auto_adjust=False, progress=False)
    ['Adj Close']
    .pct_change()
)
(
    returns # daily returns from 1962 through today
    .dropna() # drop days with incomplete returns
    .iloc[:-1] # drop today, which is likely a partial-day return
    .mean() # calculate mean of daily returns from GOOG IPO through yesterday
)
Ticker
AAPL   0.0014
GOOG   0.0010
IBM    0.0004
MSFT   0.0008
dtype: float64

What are the standard deviations of daily returns for these four stocks?

(
    returns # daily returns from 1962 through today
    .dropna() # drop days with incomplete returns
    .iloc[:-1] # drop today, which is likely a partial-day return
    .std() # calculate standard deviation (volatility) of daily returns from GOOG IPO through yesterday
)
Ticker
AAPL   0.0204
GOOG   0.0193
IBM    0.0144
MSFT   0.0170
dtype: float64

What are the annualized means and standard deviations of daily returns for these four stocks?

ann_means = (
    returns # daily returns from 1962 through today
    .dropna() # drop days with missing returns
    .iloc[:-1] # drop today, which is likely a partial-day return
    .mean() # calculate mean of daily returns from close of GOOG IPO through yesterday
    .mul(252) # means grow linearly with time, so multiply by 252
)

ann_means
Ticker
AAPL   0.3570
GOOG   0.2528
IBM    0.1113
MSFT   0.1900
dtype: float64
ann_stds = (
    returns # daily returns from 1962 through today
    .dropna() # drop days with incomplete returns
    .iloc[:-1] # drop today, which is likely a partial-day return
    .std() # calculate mean of daily returns from close of GOOG IPO through yesterday
    .mul(np.sqrt(252)) # variances grow linearly with time, so standard deviations grow sqrt(T), so multiply by sqrt(252)
)

ann_stds
Ticker
AAPL   0.3234
GOOG   0.3061
IBM    0.2282
MSFT   0.2693
dtype: float64

Plot annualized means versus standard deviations of daily returns for these four stocks

Here is a crude plot!

plt.scatter(x=ann_stds, y=ann_means)

But we can do better than a crude plot! We will typically combine data into a data frame to make plotting easier. Because ann_std and ann_means are pandas’ series, so we can use pd.DataFrame to combine them into a data frame.

df = pd.DataFrame({'Volatility': ann_stds, 'Mean Return': ann_means})

df
Volatility Mean Return
Ticker
AAPL 0.3234 0.3570
GOOG 0.3061 0.2528
IBM 0.2282 0.1113
MSFT 0.2693 0.1900
Note

Below, we could use enumerate() instead of .iterrows(). However, enumerate() loops over column names instead of row indexes and contents. Therefore, with enumerate(), we would have to .transpose() our data frame, then use the tickers to slice the rows of our original data frame. Here iterrows() combines these several steps into one.

ax = df.plot(kind='scatter', x='Volatility', y='Mean Return')

for i, (v, mr) in df.iterrows():
    plt.text(s=i, x=v, y=mr)

ax.xaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))
ax.yaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

plt.xlabel('Annualized Volatility of Daily Returns (%)')
plt.ylabel('Annualized Mean of Daily Returns (%)')

plt.title('Returns versus Risk for Tech Stocks')
plt.show()

Repeat the previous calculations and plot for the stocks in the Dow-Jones Industrial Index (DJIA)

We can find the current DJIA stocks on Wikipedia. We must download new data, into tickers_2, data_2, and returns_2.

url_2 = 'https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average'
wiki_2 = pd.read_html(io=url_2)
type(wiki_2)
list
tickers_2 = wiki_2[2]['Symbol'].to_list()
returns_2 = (
    yf.download(tickers=tickers_2, auto_adjust=False, progress=False)
    ['Adj Close']
    .iloc[:-1]
    .pct_change()
    .dropna()
)
df_2 = pd.DataFrame({
    'Volatility': returns_2.std().mul(np.sqrt(252)),
    'Mean Return': returns_2.mean().mul(252)
})
dates_2 = returns_2.index
dates_2[0]
Timestamp('2008-03-20 00:00:00')
dates_2[-1]
Timestamp('2025-02-27 00:00:00')
ax = df_2.plot(kind='scatter', x='Volatility', y='Mean Return')

for i, (v, mr) in df_2.iterrows():
    plt.text(s=i, x=v, y=mr)

ax.xaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))
ax.yaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

plt.xlabel('Annualized Volatility of Daily Returns (%)')
plt.ylabel('Annualized Mean of Daily Returns (%)')

plt.title(f'Returns versus Risk for DJIA Stocks\n from {dates_2[0]:%B %Y} to {dates_2[-1]:%B %Y}')
plt.show()

We can use the seaborn package to add a best-fit line! More on seaborn here: https://seaborn.pydata.org/index.html

import seaborn as sns
ax = sns.regplot(data=df_2, x='Volatility', y='Mean Return')

for i, (v, mr) in df_2.iterrows():
    plt.text(s=i, x=v, y=mr)

ax.xaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))
ax.yaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

plt.xlabel('Annualized Volatility of Daily Returns (%)')
plt.ylabel('Annualized Mean of Daily Returns (%)')

plt.title(f'Returns versus Risk for DJIA Stocks\n from {dates_2[0]:%B %Y} to {dates_2[-1]:%B %Y}')
plt.show()

Calculate total returns for the stocks in the DJIA

We can use the .prod() method to compound returns as \(1 + R_T = \prod_{t=1}^T (1 + R_t)\). Technically, we should write \(R_T\) as \(R_{0,T}\), but we typically omit the subscript \(0\).

In general, I prefer to do simple math on pandas objects (data frames and series) with methods instead of operators:

For example:

  1. .add(1) instead of + 1
  2. .sub(1) instead of - 1
  3. .div(1) instead of / 1
  4. .mul(1) instead of * 1

The advantage of methods over operators, is that we can easily chain methods without lots of parentheses.

We can use the .clipboard() method to quickly move data to Excel!

returns_2.to_clipboard()
total_returns_2 = returns_2.add(1).prod().sub(1)

ax = total_returns_2.sort_values().plot(kind='barh')

ax.xaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

plt.xlabel('Total Return (%)')

plt.title(f'Total Returns for DJIA Stocks\n from {dates_2[0]:%B %Y} to {dates_2[-1]:%B %Y}')
plt.show()

Plot the distribution of total returns for the stocks in the DJIA

We can plot a histogram, using either the plt.hist() function or the .plot(kind='hist') method.

A histogram is a great way to visualize data!

ax = total_returns_2.plot(kind='hist')

ax.xaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

plt.xlabel('Total Return (%)')

plt.title(f'Distribution of Total Returns for DJIA Stocks\nfrom {dates_2[0]:%B %Y} to {dates_2[-1]:%B %Y}')
plt.show()

Which stocks have the minimum and maximum total returns?

If we want the values, the .min() and .max() methods are the way to go!

total_returns_2.min()
2.1510
total_returns_2.max()
295.7450

The .min() and .max() methods give the values but not the tickers (or index). We use the .idxmin() and .idxmax() to get the tickers (or index).

total_returns_2.idxmin()
'VZ'
total_returns_2.idxmax()
'NVDA'

Here is what I would use to capture values and tickers!

total_returns_2.sort_values().iloc[[0, -1]]
Ticker
VZ       2.1510
NVDA   295.7450
dtype: float64

Not the exactly right tool here, but the .nsmallest()' and.nlargest()` methods are really useful!

total_returns_2.nsmallest(3)
Ticker
VZ    2.1510
BA    2.2134
CVX   2.7258
dtype: float64
total_returns_2.nlargest(3)
Ticker
NVDA   295.7450
AAPL    59.8113
AMZN    58.4955
dtype: float64

Plot the cumulative returns for the stocks in the DJIA

We can use the cumulative product method .cumprod() to calculate the right hand side of the formula above.

ax = (
    returns_2
    .add(1)
    .cumprod()
    .sub(1)
    .plot(legend=False) # with 30 stocks, this legend is too big to be useful
)

ax.yaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

plt.ylabel('Cumulative Return (%)')

plt.title(f'Cumulative Returns for DJIA Stocks\nfrom {dates_2[0]:%B %Y} to {dates_2[-1]:%B %Y}')
plt.show()

Repeat the plot above with only the minimum and maximum total returns

ax = (
    returns_2
    [total_returns_2.sort_values().iloc[[0, -1]].index] # slice min and max total return stocks
    .add(1)
    .cumprod()
    .sub(1)
    .plot(legend=False) # with 30 stocks, this legend is too big to be useful
)

ax.yaxis.set_major_formatter(FuncFormatter(lambda x, _: f'{x*100:,.0f}'))

plt.ylabel('Cumulative Return (%)')

plt.title(f'Cumulative Returns for DJIA Stocks\nfrom {dates_2[0]:%B %Y} to {dates_2[-1]:%B %Y}')
plt.show()