# Problem Set 1 hint…

Problem Set 1 is due at the beginning of class on Tuesday, January 16. 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” of the 4th question 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.

# Graph of the day: Daily volatility of Bitcoin (BTC) vis-à-vis other asset classes

Graph of the day – daily volatility of Bitcoin (BTC) vis-à-vis other asset classes (WTI (oil), silver, gold, US stocks (SP500), Euro/Dollar exchange rate, 10 year T-bond, 1 year T-bill, and 1 month T-bill). Source: WSJ Daily Shot, 11-January-2018.

# Extra Credit Opportunity

I have decided to offer the following extra credit opportunity for Finance 4335. You can earn extra credit by attending and reporting on Dr. Richard Vedder’s upcoming lecture entitled “Can Markets Improve College Education and Make it More Affordable”:

Thursday, January 18
Foster 250 @ 4:00 pm
Richard Vedder: Distinguished Professor of Economics at Ohio University // Adjunct Scholar at American Enterprise Institute
Talk Title: “Can Markets Improve College Education and Make it More Affordable”

If you decide to take advantage of this opportunity, I will use the grade you earn to replace your lowest quiz grade in Finance 4335 (assuming that your grade on the extra credit is higher than your lowest quiz grade).  The report should be in the form of a 1-2 page executive summary in which you provide a critical analysis of Dr. Vedder’s lecture.  In order to receive credit, the report must be submitted via email to risk@garven.com in either Word or PDF formats by no later than Monday, January 22 at 5 p.m.

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

At any given point in time during the upcoming semester, you can ensure that you are on track with Finance 4335 assignments by monitoring due dates which 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 in 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 for Thursday, January 11, this means that a quiz based upon these readings will be given in class on that day.

Important assignments due on the second class meeting of Finance 4335 (scheduled for Thursday, January 11) include: 1) filling out and emailing the student information form as a file attachment to risk@garven.com, 2) subscribing to the Wall Street Journal, and 3) subscribing to the course blog. 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, tasks 2 and 3 listed above count toward your class participation grade in Finance 4335.

# Graduate assistant for Finance 4335

Allow me to introduce you to the graduate assistant for Finance 4335. Alexander Law is an MSECO student, and his email address is Alexander_Law@baylor.edu.

# Computers and productivity: Evidence from laptop use in the college classroom

In the April 2017 issue of Economics of Education Review, an article entitled “Computers and productivity: Evidence from laptop use in the college classroom” provides convincing empirical evidence against allowing laptop use in the classroom (which is why laptops are generally not allowed in Finance 4335 – see the first bullet point under section 8.2 of the course syllabus). Anyway, here are the highlights from this article:

• Computer use in college classrooms is commonplace.
• We use a quasi-experimental design to identify the effects of laptop use in college classrooms.
• We find that computer use has a significant negative effect on student grades.
• The negative effects of computer use are concentrated among males and low performing students.

# 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.

The Wall Street Journal recently published an important article (linked below) which documents the (unprecedented) synchronized compression of implied volatility across multiple asset classes; specifically, US equities, oil, gold, and US interest rates.

# On the relationship between the S&P 500 and the CBOE Volatility Index (VIX)

Besides going over the syllabus during the first day of class on Tuesday, January 9, we will also discuss a “real world” example of financial risk. Specifically, we will look 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 25 of next Tuesday’s lecture note, 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 7,056 daily observations on these two variables, spanning the time period from January 2, 1990 through December 29, 2017. When we fit a regression line through this scatter diagram, we obtain the following equation:

${R_{SP500}} = 0.00058 - 0.1187{R_{VIX}}$,

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 slope of this line (-0.1187) 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, 49.2%) can be statistically “explained” by changes in volatility, and the correlation between ${R_{SP500}}$ and ${R_{VIX}}$ comes out to -0.7014. While a correlation of -0.7014 does not imply that ${R_{SP500}}$ and ${R_{VIX}}$ will always move in opposite directions, it does indicate that this will be the case more often than not. Indeed, closing daily returns on ${R_{SP500}}$ and ${R_{VIX}}$ during this period moved inversely 78% of the time.

# Instructions for subscribing to the Risk Management Course Blog

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:

After clicking “Subscribe”, the following information will appear on the screen:
Next, check for an email from “Risk Management Blog <donotreply@wordpress.com> ”:

Next, simply click the “Confirm Follow” button. This will cause you to receive the following email:

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.