During the next couple of Finance 4335 class meetings, besides covering new ground, we will work our way through the Portfolio and Capital Market Theory class problem which I just posted @ http://fin4335.garven.com/fall2020/pcmclassproblem.pdf.
… are available at http://fin4335.garven.com/fall2020/ps5solutions.pdf.
… are available at http://fin4335.garven.com/fall2020/ps6solutions.pdf.
Important reminder for Finance majors from my colleague and department chair, Dr. Underwood:
Just a quick reminder that we will have another webinar this Friday 10/23 at 1:30. Jesus Rios (BBA 2010) will be our guest. He started his career with the BVA Group and is now the Director of Finance for Blackline Midstream. You can register for the Zoom webinar at this link:
Also, please consider contributing your experiences to a new database we are starting. We hope to create and maintain a database of questions asked by interviewers (both for internships and full-time positions.) For more information, please visit this page and follow the link to the survey. There will be a module on the Canvas home page for our Department where we will provide updates to the database periodically.
Have a great week!
Throughout this problem, there is adverse selection, but it turns out that MostStates’ entry in part C (into the market previously monopolized by Gecko in parts A-B) mitigates adverse selection somewhat, while also expanding risk management opportunities, particularly for the low and medium risk types. Solving this problem requires figuring out who purchases which policies and calculating the expected profit (or loss) per policyholder type in each of parts A, B, C, D, and E of this problem. Once you perform these calculations, then the average profit (or loss) per policy is simply the average loss per policy, based on which driver types purchase each policy.
I just completed a substantial rewrite and updating of Tuesday’s assigned reading, entitled “Portfolio and Capital Market Theory”. This version is much more succinct and better written (in terms of clarity) than the version it replaced a few minutes ago. Enjoy!
The class problem is available at http://fin4335.garven.com/fall2020/adverseselection.pdf, and the solutions to the class problem are available at http://fin4335.garven.com/fall2020/adverseselectionsolutions.pdf.
… are available at http://fin4335.garven.com/fall2020/moralhazardsolutions.pdf.
I plan to devote part of tomorrow’s class meeting for Finance 4335 to solving the “Moral Hazard Class Problem” linked below.
In a nutshell, this problem looks carefully at how to go about designing a so-called “incentive compatible contract” between a corporate owner (the principal) and manager (the agent). The trick involves making sure that both the principal and the agent have “skin in the game”; here, this pertains to offering the corporate manager an incentive compensation scheme involving a cut in salary that is supplemented by a bonus if certain profit targets are met.
See y’all tomorrow!