Some comments and clarifications about solutions for problem set 3

Whenever you submit a problem set in Finance 4335, I highly recommend that you compare your work with the solutions that I post on the course blog.  In the case of problem set 3, students seemed to have the most difficulty with problem 1, part B, and also problem 2, parts B and C.

In a nutshell, in 1B, Ned is willing to pay the most for insuring risk, since after all, he is the only one of the three who is risk averse; Dusty is risk neutral, whereas Lucky is risk loving.  Indeed, as I show in the solution for 1B, Ned is willing to pay up to $12.64 more than the actuarially fair value of .25(100), which implies an insurance price of $37.64. Since Dusty is risk neutral, he is indifferent between having certain wealth of $115 and uncertain wealth with an expected value of $115; the most Dusty is willing to pay for insurance is its actuarially fair value of .25(100)  = $25.  Since Lucky is risk loving, he will only insure risk if it is available for a $4.46 discount from its actuarially fair value of $25, which comes to $20.54.

Also, in problem 2A, since you’re risk averse, the Bernoulli principle tells us that risk averters are happy to pay actuarially fair prices (in this case, $180).  Also, in problem 2B, a price of  $250 is acceptable because U($750) = 6.71 > expected utility of no insurance = 6.45.  Finally, in problem 2C, the maximum price for full coverage is equal to the sum of the actuarially fair price of $180 plus the risk premium (\lambda = 189.04), or $369.04.  Note that this also corresponds to the difference between the initial wealth of $1,000 and the certainty equivalent of wealth of $630.96 under the self-insurance option.

Finance 4335 policy for submitting completed problem sets via Canvas

At the risk of redundancy (e.g., see the screenshot below for Problem Set 4 on Section 2’s Canvas site and section “8. 2. Late Work” on page 3 of the course syllabus), let me remind everyone that Finance 4335 problem sets must be submitted in PDF format via Canvas; paper copies or file formats other than PDF are not accepted.  Furthermore, given how simple it is to merge multiple pages into a single PDF document (see the instructions provided here), I also expect students to submit their completed problem sets as single PDF documents.

Let me know whether any of you have any questions about the Finance 4335 Problem Set submission policy.


Finance 4335 student query about availability of Sample Midterm 1 Exam Booklet and Midterm Exam 1 Formula Sheet

From: Finance 4335 Student <>
Date: Wednesday, September 13, 2023 at 5:10 PM
To: Garven, James <>
Subject: FIN 4335 Midterm Exam 1

Good Morning, Dr. Garven,

I have a quick question regarding the Midterm Exam 1 coming up in the next few weeks. I was wondering when the Sample Midterm 1 Exam Booklet as well as the Midterm Exam 1 Formula Sheet would be available for us.

Also, would we be able to use this formula sheet on the exam?


Finance 4335 Student
From: Garven, James <>
Sent: Wednesday, September 13, 2023 5:24 PM
To: Finance 4335 Student <>
Subject: Re: FIN 4335 Midterm Exam 1

Dear Finance 4335 Student,

My answer is yes to both of your questions. I intend to upload the sample Midterm Exam #1 to the course website on Tuesday, September 19. This is to ensure that students have ample time to review it before the Midterm Exam #1 Review Session, which is scheduled for our class meeting on Thursday, September 21.

Regarding the “real” Midterm Exam #1 Formula Sheet, I intend to upload this document to the course website in time for the Midterm Exam #1 Review Session on 9/21, and I will include this same document as an attachment to the Midterm Exam #1 booklet on the exam day itself, which is Tuesday, September 26.

Dr. Garven

Friendly reminder about assigned readings, Problem Set 3, and Quiz 4 due Thursday, September 14

Here’s a friendly reminder regarding the assigned readings, Problem Set 3, and Quiz 4 which are due prior to the start of class on Thursday, September 14th.

Here are the links for the two assigned readings:

1. Expected Utility, Mean-Variance, and Stochastic Dominance, by James R. Garven
2. Modeling Risk Preferences Using Taylor Series Expansions of Utility Functions, by James R. Garven

Here is the link for Problem Set 3:

Problem Set 3 (Expected Utility)

Finance 4335 Grades on Canvas

Here is a “heads-up” about the Finance 4335 grade book on Canvas.  There, you will find grade averages that reflect 1) attendance grades for the 4 class meetings that have occurred to date, 2) quizzes 1-2, and 3) problem set 1 plus the student survey.  Thus, your current (September 4) course numeric grade in Finance 4335 is based on the following equation:

(1) Current Course Numeric Grade = (.10(Attendance and Participation) +.10(Quizzes) +.20(Problem Sets))/.4

Note that equation (1) is a special case of the final course numeric grade equation (equation (2) below) which also appears in the “Grade Determination” section of the course syllabus:

(2) Final Course Numeric Grade =.10(Attendance and Participation) +.10(Quizzes) +.20(Problem Sets) + Max{.20(Midterm Exam 1) +.20(Midterm Exam 2) +.20(Final Exam), .20(Midterm Exam 1) +.40(Final Exam), .20(Midterm Exam 2) +.40(Final Exam)}

My goal going forward is for the Finance 4335 grade book to dynamically incorporate new grade information on a timely basis for each student, consistent with the final course numeric grade equation.  For example, after midterm 1 grading is complete, equation (3) will be used to determine your numeric course grade:

(3) Course Numeric Grade after Midterm 1 = (.10(Attendance and Participation) +.10(Quizzes) +.20(Problem Sets) +.20(Midterm 1))/.6

After midterm 2 grades are recorded, equation (4) will be used to determine your numeric course grade at that point in time:

(4) Course Numeric Grade after Midterm 2 = (.10(Attendance and Participation) +.10(Quizzes) +.20(Problem Sets) +.20(Midterm 1) +.20(Midterm 2))/.8

After the fall semester and the final exam period are over, all Finance 4335-related grades will have been collected, and I will use equation 2 above to calculate your final course numeric grade.  At that time, your final course letter grade will be based on the following schedule (which appears in the “Grade Determination” section of the course syllabus):

A 93-100% C 73-77%
A- 90-93% C- 70-73%
B+ 87-90% D+ 67-70%
B 83-87% D 63-67%
B- 80-83% D- 60-63%
C+ 77-80% F <60%


Gamma Iota Sigma Interest Meeting, August 31, 6:30-7:30 in Foster 322

The purpose of the Gamma Iota Sigma (GIS) at Baylor University is to promote, encourage, and sustain student interest in insurance, risk management, and actuarial science as professions, to promote high moral and academic excellence of chapter members, and to facilitate the interaction between Baylor University and the business community by fostering research activities, scholarship, and networking opportunities.