As an antidote to yesterday’s Business Roundtable decision to throw Friedman’s shareholder-centric model under the bus in favor of “… the more politically au courant “stakeholder” model”, The Wall Street Journal editorial board reminds us about Milton Friedman’s famous 1970 New York Times Magazine article entitled “The Social Responsibility of Business is to Increase its Profits” (linked to in this article and also from http://umich.edu/~thecore/doc/Friedman.pdf.
Besides going over the course syllabus during the first day of class on Tuesday, August 27, we will also discuss a particularly important “real world” example of financial risk. Specifically, we will look at the relationship between stock market returns (as indicated by daily percentage changes in the SP500 stock market index) and stock market volatility (as indicated by daily percentage changes in the CBOE Volatility Index (VIX)): As indicated by this graph from page 21 of the lecture note for the first day of class, daily percentage changes on closing prices for 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 7,465 daily observations on these two variables, spanning the time period from January 3, 1990 through August 16, 2019. When we fit a regression line through this scatter diagram, we obtain the following equation:
where corresponds to the daily return on the SP500 index and corresponds to the daily return on the VIX index. The slope of this line (-0.1129) 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, 48.87%) can be statistically “explained” by changes in volatility, and the correlation between and comes out to -0.699. While a correlation of -0.699 does not imply that and will always move in opposite directions, it does indicate that this will be the case more often than not. Indeed, closing daily returns on and during this period moved inversely 78.43% of the time.
You can see how the relationship between the SP500 and VIX evolves prospectively by entering http://finance.yahoo.com/quotes/^GSPC,^VIX into your web browser’s address field.
Since many of the topics covered in Finance 4335 require a basic knowledge and comfort level with algebra, differential calculus, and probability & statistics, the second class meeting during the Fall 2019 semester will include a mathematics tutorial, and the third and fourth class meetings 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):
- Algebra: Intro to the Binomial Theorem, Pascal’s Triangle and Binomial Expansion
- Calculus: Taking derivatives, Optimization with calculus, Visualizing Taylor Series for e^x
- Probability and statistics: Basic probability, Compound, independent events, Permutations, Combinations, probability using combinatorics, Random variables and probability distributions, Binomial distribution, Law of Large Numbers, and Introduction to the Normal Distribution.
Finally, if your algebra skills are generally a bit on the rusty side, I would also recommend checking out the Khan Academy’s review of algebra.
A subscription to the Wall Street Journal is required for Finance 4335. Steeply discounted digital and print subscription options for Finance 4335 students are available from the following link: https://r.wsj.com/PROFxypa.
Throughout the semester, I will often reference specific WSJ articles on the course blog and in class. Finance 4335 topics (as well as topics in many of your other business school courses) 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 the competition, 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 courses and careers:
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, 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 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 risk management 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:
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.