# Chartered Financial Analyst (CFA) Information Session: Monday, August 29th @ 4:30pm in FOS 143/144

Do you want to be an investor or a financial professional?

Do you want to challenge yourself within the field of investment and finance?

Do you want to differentiate yourself in a tough job market?

The Chartered Financial Analyst (CFA) program is a globally recognized standard for measuring the competence and integrity of financial analysts, and a valued credential by investment firms, banks, and financial institutions around the world. If you have unanswered questions about the CFA program and want to find out if it is right for you, come discover its advantages from industry professionals with the CFA designation. Topics will include:

· Who should pursue the CFA designation

· The CFA charter and your career

· Who employs CFA charterholders

· International recognition

· Requirements for taking the exams and receiving the charter

· Exam topics and preparation

· Scholarships

# Problem Set 1 hint…

Problem Set 1 is due at the beginning of class on Tuesday, August 30. Here is a hint for solving the 4th question on problem set 1.

The objective is to determine how big a hospital must be so that the cost per patient-day is minimized. We are not interested in minimizing total cost; if this were the case, there would be no hospital because marginal costs are positive, which implies that total cost is positively related to the number of patient-days.

The cost equation C = 4,700,000 + 0.00013X2 tells you the total cost as a function of the number of patient-days. This is why you are asked in part “a” to derive a formula for the relationship between cost per patient-day and the number of patient days. Once you have that equation, then that is what you minimize, and you’ll be able to answer the question concerning optimal hospital size.

# A Year After Stocks Armageddon, It’s Smooth Sailing for Markets – Bloomberg

This Bloomberg article discusses, among other things, possible implications of historically low market volatility (as indicated by VIX) and interest rates for the future performance of the financial markets.

“It’s a fragile recovery the Fed has nursed very carefully, and they don’t want to do anything to put that in jeopardy.”

# Rules for calculating (math) derivatives

Here’s a particularly useful list of rules for calculating (math) derivatives (taken from the “Optimization” reading assignment):

# A preview of future topics in Finance 4335

Thursday’s Finance 4335 class meeting will be devoted to a math tutorial, and next week we will devote our attention to various topics in probability and statistics that are important for Finance 4335. The week following, we will begin to delve into a wide array of risk management topics.

The first risk management topic in Finance 4335 is decision theory, which addresses decision making under risk and uncertainty. Risk management lies at the very heart of decision theory. However, in order to manage risk, we need to measure risk, which is why next week’s tutorial on probability and statistics is quite important.

Initially, we’ll focus our attention upon variance as our risk measure. Most basic finance and economics models implicitly or explicitly assume that risk = variance. We’ll learn that while this is a reasonable assumption to make under some circumstances, other circumstances exist where it is not appropriate. Furthermore, since individuals and firms are typically exposed to multiple sources of risk, we need to take into consideration the portfolio effects of risk. To the extent to which risks are not perfectly positively correlated, this implies that risks often “manage” themselves by canceling each other out. Thus the risk of a portfolio is typically less than the sum of the individual risks which comprise the portfolio.

The decision theory provides us with a very useful framework for thinking about concepts such as risk aversion and risk tolerance. The calculus comes in handy by providing an analytic framework for determining “optimal” exposure to risk. More specifically, the calculus helps us determine how much risk we hold onto and how much risk we transfer to others. Such decisions occur regularly in our daily lives, encompassing all sorts of practical problems such as deciding 1) how to allocate assets in a 401-K or IRA, 2) whether to insure our health, life, and property, 3) whether to work for a startup or an established business, and so forth. There’s also quite a bit of ambiguity when we make decisions without complete information, but this course will at least help you think critically about costs, benefits, and trade-offs related to decision-making whenever you encounter risk and uncertainty.

After decision theory, the next risk management topic is the demand for insurance, which will be covered just prior to the first midterm exam in Finance 4335. This topic showcases the application of decision theory to a very practical problem that we all face in our lives; specifically, under what circumstances does it make sense to insure risk, and how do real-world contract features (such as coinsurance, deductibles, upper limits, etc.) affect our welfare.

After the first midterm, we’ll move on to other topics including asymmetric information, portfolio theory, capital market theory, option pricing theory, and corporate risk management.

# How to know whether you are on track with Finance 4335 assignments

At any given point in time during the semester, you can ensure that you are on track with Finance 4335 assignments by monitoring due dates that are published on the course website. See http://fin4335.garven.com/readings/ for due dates pertaining to reading assignments, and http://fin4335.garven.com/problem-sets/ for due dates pertaining to problem sets. Also keep in mind that short quizzes will be administered at the beginning of class on each of the dates indicated for required readings. As a case in point, since the required readings entitled “Optimization” and ” How long does it take to double (triple/quadruple/n-tuple) your money?” are listed as being due on Thursday, August 25, this means that class will begin with a quiz based upon that reading.

Also, don’t forget that you need to 1) fill out and submit the student information form, 2) subscribe to the Wall Street Journal , and 3) subscribe to the course blog prior to the start of class on Thursday, August 25. A completed Student information form is graded as a problem set and receives 100 points; if you don’t turn in a Student information form, then you will receive a 0 for this “problem set”. Furthermore, I count completion of tasks 2 and 3 above toward your class participation grade in Finance 4335.

# CBOE Volatility (VIX) and the SP500

Besides going over the syllabus during today’s class meeting, we also discussed a “real world” example of financial risk; specifically, we looked at the relationship between short-term stock market volatility (as indicated by the CBOE Volatility Index (VIX)) and returns (as indicated by the SP500 stock market index).

As indicated by this graph from page 21 of today’s lecture note, daily percentage changes on VIX and the SP500 are strongly negatively correlated. In the graph above, the y-axis variable is the daily return on the SP500, whereas the x-axis variable is the daily return on the VIX. The blue points represent 6,706 daily observations on these two variables, spanning the time period from January 2, 1990 through August 10, 2016. When we fit a regression line through this scatter diagram, we obtain the following equation:

${R_{SP500}} = 0.0005 - 0.1318{R_{VIX}}$,

where ${R_{SP500}}$ corresponds to the daily return on the SP500 index and ${R_{VIX}}$ corresponds to the daily return on the VIX index. The intercept-value for this line (0.05%) indicates that on average, daily stock returns during this time period were positive. However, the slope of this line (-0.1318) indicates that on average, daily VIX returns during this time period were inversely related to the daily return on the SP500; i.e., when volatility as measured by VIX went down (up), then the stock market return as indicated by SP500 typically went up (down). Nearly half of the variation in the stock market return during this time period (specifically, 47.4%) can be statistically “explained” by changes in volatility, and the correlation between ${R_{SP500}}$ and ${R_{VIX}}$ comes out to -0.688.

While a correlation of -0.688 does not indicate that ${R_{SP500}}$ and ${R_{VIX}}$ will move inversely at all times, it does indicate that this will be the case more often than not. You can confirm this on your own by seeing how the relationship between the SP500 and VIX evolves going forward. A simple way to do this would be to use the Yahoo Finance website; specifically, enter http://finance.yahoo.com/quotes/^GSPC,^VIX into your web browser’s address field and see for yourself.

# The 17 equations that changed the course of history (spoiler alert: we use 3 of these equations in Finance 4335!)

Equations (2), (3), and (7) play particularly important roles in Finance 4335!

From Ian Stewart’s book, these 17 math equations changed the course of human history.