Economics, Finance, Humor

Derek Zoolander, spherical cows, the Guardian, and econophysics

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Wonderful explanation of the logical fallacy associated with dismissing theories based upon modeling assumptions that are not literally true… HT to Scott Cunningham.

Derek Zoolander, spherical cows, the Guardian, and econophysics

In Zoolander, the titular character is presented with a model of a building.  He inspects the model and responds with anger and indignation:

Derek Zoolander: What is this? [smashes the model for the reading center] A center for ants?

Mugatu: What?

Derek Zoolander: How can we be expected to teach children to learn how to read… if they can’t even fit inside the building?

Finance, Risk, The Real World

Markets’ Steady Climb in 2017 Defies Historic Odds

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This WSJ article provides helpful historical context concerning stock market volatility and performance.  The lowest daily VIX closing price ever recorded in its 27-1/2 year history was 9.31 on December 22, 1993 (followed by 9.48 the following day – December 23, 1993).   The closing price for VIX of 9.51 on July 14 is the third lowest close on record. The long-run average for VIX comes in at around 20, and the highest close ever recorded was 80.86 on November 20, 2008 (during the throes of the global financial crisis of 2008).

Markets’ Steady Climb in 2017 Defies Historic Odds
Three major stock-market benchmarks in the U.S., Europe and Asia have avoided pullbacks this year, commonly defined as 5% declines from recent highs.
Finance, The Real World

Small Companies Are Gone, but Should They be Forgotten?

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Quoting from this article, “The number of stocks has halved over the past two decades, to less than 3,600 from nearly 7,400, with most of the declines coming among the smallest companies.” According to a March 2017 Journal of Financial Economics paper by Doidge, Karolyi and Stulz, the U.S. has “abnormally few listed firms” compared with other countries; this “U.S. listing gap” is apparently due to a decrease in new listings coupled with an increase in delistings over this period.

Small Companies Are Gone, but Should They be Forgotten? – MoneyBeat – WSJ
How much should you care about the decline in the number of publicly traded companies?
Risk, The Real World

Is Your Job About To Disappear?

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According to this BloombergBusinessWeek article dated June 22, 2017, the best paid, most vulnerable occupations include “… accountants, benefits managers, credit analysts, and various insurance professionals”… (the y axis measures average annual wage for various occupations, and the x axis measures the likelihood of these occupations going away due to automation.

Is Your Job About To Disappear?
Use this tool to find out if robots are the future of your profession.
bloomberg.com
Finance, Risk, The Real World

Index Funds Still Beat ‘Active’ Portfolio Management

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Princeton professor Burton Malkiel (author of “A Random Walk Down Wall Street“, now in its 11th edition, and chief investment officer for Wealthfront) explains why indexed investment is by far and away the best strategy for preserving and growing one’s savings.  For a very compelling and more in-depth treatment of this topic, I highly recommend also listening to Barry Ritholtz’s recent interview of Professor Malkiel  @ https://www.bloomberg.com/news/audio/2017-03-31/replay-interview-with-burt-malkiel-masters-in-business-audio.

Index Funds Still Beat ‘Active’ Portfolio Management – WSJ
There is no better way for individuals to invest in the stock market and save for retirement.
Economics, Finance, Risk, The Real World

The Index Fund featured as one of “50 Things That Made the Modern Economy”

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In this week’s installment of “Fifty Things That Made the Modern Economy”, Tim Harford features the index fund. This 9 minute long podcast lays out the history of the development of the index fund in particular and the evolution of so-called of passive portfolio strategies in general. Much of the content of this podcast is sourced from Vanguard founder Jack Bogle’s September 2011 WSJ article entitled “How the Index Fund Was Born” (available at https://www.wsj.com/articles/SB10001424053111904583204576544681577401622). Here’s the description of this podcast:

“Warren Buffett is the world’s most successful investor. In a letter he wrote to his wife, advising her how to invest after he dies, he offers some clear advice: put almost everything into “a very low-cost S&P 500 index fund”. Index funds passively track the market as a whole by buying a little of everything, rather than trying to beat the market with clever stock picks – the kind of clever stock picks that Warren Buffett himself has been making for more than half a century. Index funds now seem completely natural. But as recently as 1976 they didn’t exist. And, as Tim Harford explains, they have become very important indeed – and not only to Mrs Buffett.”

50 Things That Made the Modern Economy, Index Fund
Warren Buffett is one of the world’s great investors. His advice? Invest in an index fund
bbc.co.uk
Assignments, The Real World

How to obtain a Fall 2017 Wall Street Journal subscription

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A subscription to the Wall Street Journal is required for Finance 4335. In order to subscribe to the Wall Street Journal (WSJ) for the Fall 2017 semester, go to http://wsj.com/studentoffer. You can subscribe for 15 weeks for $1 per week, or for an entire year for slightly less than $1 per week (i.e., for $49). You also have a choice between getting the digital version of WSJ or the digital and paper versions for these same prices. Whatever options you select, please also reference my name (James R. Garven) as your referring professor.

Throughout the semester, I will often reference specific WSJ articles in class and on the course blog. Finance 4335 topics (as well as topics in most of the rest of your classes) come to life in the world outside the Baylor bubble when you read make a habit of reading the WSJ on a regular basis. Furthermore, if you expect to interview for jobs or internships anytime soon, reading the WSJ will give you a leg up on your competition in the job market, since you will be better informed and have more compelling ideas and insights to share with recruiters.

In closing, the following (2 minute) video provides a helpful introduction to the WSJ, providing time-saving tips to help you get the most from WSJ and succeed not only in Finance 4335, but also your other classes and career:

Assignments

Instructions for subscribing to the Risk Management Course Blog

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A course blog has been established for Finance 4335 at the address http://risk.garven.com; it is also linked from the “Course Blog” button located on the course website. I recommend that you follow the risk management course blog regularly via email, RSS, Facebook, and/or Twitter.

The risk management course blog provides me with a convenient means for distributing important announcements to the class. Topics covered on the course blog typically include things like changes in the course schedule, clarifications and hints concerning problem sets, information about upcoming exams, announcements concerning extra credit opportunities, and short blurbs showing how current events relate to many of the topics which we cover in Finance 4335.

If you already are familiar with RSS, this is a great way to subscribe to the options, futures, and other derivatives course blog. By going to the http://risk.garven.com/feed webpage, you can subscribe by using Firefox’s Live Bookmarks feature, Internet Explorer’s RSS feed subscription feature, or an RSS reader. If you are either a Facebook or Twitter user, everything that is posted on the options, futures, and other derivatives course blog is automatically posted to Facebook and “tweeted”, so you can also subscribe by “liking” the Finance 4335 Facebook page or by “following” @fin4335 on Twitter. Finally, you can also subscribe via email. The remainder of this blog entry explains how to subscribe to the options, futures, and other derivatives course blog via email.

Email Subscription Instructions:

Email Subscription Instructions: If you would like to receive the risk management course blog via email, you can do this by going to http://risk.garven.com and entering your email address in the form provided on the left hand side of that webpage:

Screen Shot 2016-06-16 at 7.24.05 PM

After clicking “Subscribe”, the following information will appear on the screen:Screen Shot 2016-06-16 at 3.45.08 PM
Next, check for an email from “Risk Management Blog <donotreply@wordpress.com> ”:

Screen Shot 2016-06-16 at 7.15.43 PM
Next, simply click the “Confirm Follow” button. This will cause you to receive the following email:

Screen Shot 2016-06-16 at 7.21.17 PM
From that point forward, whenever I post to the course blog, you will immediately receive a nicely formatted version of the blog posting via email. Also, you can opt to change your delivery preferences, or even cancel your subscription.

Helpful Hints, Highly Recommended, Math and Statistics

Calculus and Probability & Statistics recommendations…

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Since many of the topics covered in Finance 4335 require a basic knowledge and comfort level with differential calculus and probability & statistics, the first class meeting (August 22) will include a mathematics tutorial, and the second class meeting (August 24) will cover probability & statistics. I know of no better online resource for brushing up on (or learning for the first time) these topics than the Khan Academy.

So here are my suggestions for Khan Academy videos which cover these topics (unless otherwise noted, all sections included in the links which follow are recommended):

Finally, if your algebra is a bit rusty, I would also recommend checking out the Khan Academy’s review of algebra.

Finance 4335