Midterm 1 and Current Course Grades in Finance 4335

I just uploaded the midterm 1 grades, along with attendance, quiz, problem set, and current Finance 4335 course grades to Canvas.

As stated in the course syllabus, final numeric course grades will be determined according to the following equation:

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)}

As I noted in my February 1st blog posting entitled “Finance 4335 Grades on Canvas”, as the fall semester progresses and I continue to collect grades in the attendance, quiz, problem set, and exam categories, then the course grade listed on Canvas will dynamically incorporate that information on a timely basis for each student; now that we have Midterm 1 Exam grades, the equation that I am now using (until Midterm 2) is as follows:

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

There are n = 33 students enrolled in Finance 4335. Here are the current grade statistics:

As you can see from this table, over 50% of students have the mean or higher in each category (since in all cases, the median is higher than the mean). I base the GPA calculation on comparing each student’s current course grade to the course letter grade schedule that also appears on the syllabus:

If you are disappointed by your performance so far in Finance 4335, keep in mind that the final exam grade automatically double counts in place of a lower midterm exam grade. In case if both midterm exam grades are lower than the final exam grade, then the final exam grade replaces the lower of the two midterm exam grades. If any of you would like to have a chat with me about your grades, by all means, then set up a Zoom appointment with me.

Mea Culpa concerning today’s Arrow-Pratt numeric illustration

I reexamined my analysis of the ad hoc exact and approximation methods from the review session today, and here is a screenshot from Excel of this problem:The fair coin toss involved payoffs of $25 and $100; the expected value of wealth under this coin toss is $62.50, and the standard deviation is half of the dispersion between $25 and $100, or $37.50.  Applying the “exact” method, we get a risk premium of $6.25.  In calculating the risk premium under the Arrow-Pratt (approximation) method, I incorrectly calculated variance as 75^2 = 5,625.  Since variance is actually 37.5^2 = 1,406.25, the Arrow-Pratt equation produces a risk premium of $5.63, not $22.50.  I knew that right away that one of the model inputs had to be wrong, and it was the variance input, which was 4x the actual variance of the coin toss.

Midterm 1 formula sheet, helpful hints, pre-exam office hours

I just posted the formula sheet for the Midterm 1 exam, which will be administered during class on Thursday, February 25. Actually, the formula sheet consists of two pages; the first page is a formula sheet, and the second page is a standard normal distribution table.

The exam consists of 3 problems worth 32 points each; I add 4 points to everyone’s scores so that that the maximum number of points possible is 100. On Thursday, plan on allocating no more than 80 minutes to complete the exam, and no more than 10 minutes to upload a single PDF of your written work which clearly demonstrates your conceptual grasp and ability to clearly explain, in plain English, how you arrived at all of your answers on the exam.

You may use either a calculator or a spreadsheet for any computations that are required for the exam; please keep in mind the Official Finance 4335 Course Policy Concerning the Use of Excel for Problem Sets and Exams.

Here are some (what I think are) helpful hints:

1. Review definitions for risk aversion, risk neutrality, and risk-loving behavior; see especially page 2 of http://fin4335.garven.com/spring2021/lecture6.pdf about these topics:

  • Risk-averse utility functions are characterized by diminishing marginal utility; thus, E(U(W)) < U(E(W));
  • Risk-neutral utility functions are characterized by constant marginal utility; thus, E(U(W)) = U(E(W)); and
  • Risk-loving utility functions are characterized by increasing marginal utility; thus, E(U(W)) > U(E(W)).

2. Full coverage insurance: Under a “full coverage” policy, the insured pays a premium that transfers all risk to the insurer; if the premium charged for such coverage is actuarially fair, then the optimal choice for all arbitrarily risk-averse decision-makers is to purchase a full-coverage policy; this result is commonly referred to as “Bernoulli Principle” (see http://risk.garven.com/2021/02/22/actuarially-fair-price-of-insurance-policy/).

3. Degree of risk aversion. For logarithmic and power utilities, we saw that all such utilities feature decreasing absolute risk aversion, which means that as one’s initial wealth increases, the one’s degree of aversion to a given risk declines; resulting in a lower risk premium at higher levels of initial wealth (see pp. 9-12 of http://fin4335.garven.com/spring2021/lecture6.pdf).

On Wednesday, I plan to be available in my virtual Zoom office from 3-5 pm CT in case if any students would like to stop by for a pre-exam chat.

Good luck!

 

 

 

 

Official Finance 4335 Course Policy Concerning the Use of Excel for Problem Sets and Exams

In Finance 4335, students may use either Excel or hand-held calculators to calculate answers for problems that appear in problem sets and exams. However, in order to earn credit, students must show their work by providing logical explanations of how they get their answers, using properly formed English grammar, coupled with references to the appropriate theoretical concepts. The best examples I can think of how to “show work” appear in most of the various linked PDF documents consisting of solutions for class problems, problem sets, and sample exams @ http://risk.garven.com/?s=solutions.

Keeping this calculator policy in mind, do not upload Excel spreadsheets to Canvas related to exams and problem sets. Your grades are based solely on how well you explain and support the answers you provide in the PDF documents which you upload to Canvas.

Change of plans for this Tuesday’s Finance 4335 class meeting

The Electric Reliability Council of Texas (AKA “ERCOT”) issued a press release earlier today (see http://www.ercot.com/news/releases/show/225151) warning of possible “rotating outages” statewide for today, Monday, and Tuesday. Rather than roll the dice that we (students and faculty alike) will all have online access on Tuesday, from 2-3:15 pm, I have substituted my recorded lecture entitled “Finance 4335 – Decision Making under Risk and Uncertainty, part 4” in place of a real-time, synchronous class meeting that day. This recorded lecture is 72 minutes in length, and it is available from the Media Gallery section of the Finance 4335 Course Canvas page.

In the meantime, if you have questions about any aspect of Finance 4335, point your device’s browser to “appointment.garven.com” and set up a Zoom appointment with me there. Given the current statewide climate event (which I have nicknamed “Icepocalypse 2021”), I figure that the odds of just two people having a successful synchronous Zoom meeting (particularly on Tuesday) are much better than the odds of a few dozen people doing so.

Sincerely,

Dr. Garven

Important announcement: we will meet synchronously tomorrow via Zoom for our regularly scheduled 2-3:15 class session

Finance 4335 (Risk Management) will meet synchronously tomorrow via Zoom for our regularly scheduled 2-3:15 pm class session.  We’ll devote our attention to a (very) brief review of the expected utility model,  and devote most of our time to a discussion of the Decision Making under Risk and Uncertainty, part 3 lecture note, which, among other things, considers broader measures of risk beyond variance.

If you haven’t already watched the February 2nd, 4th, and 9th lectures that are available in the Media Gallery on Canvas, be sure to do so prior to tomorrow’s class.  Tomorrow’s lecture topic builds on the foundational principles set forth in those lectures, so you will get much more out of tomorrow’s class meeting if you are already familiar with the concepts covered there.

One final note – The due date for Problem Set 3 was 2/11; it is now 2/16.

Finance 4335 Grades on Canvas

I just finished posting Finance 4335 numeric course grades to Canvas.  To date, grades have been assigned for four class meetings, two quizzes, a student survey, and one problem set. Each class attendance (absence) receives a grade of 100 (0); I assigned a grade of 100 for all surveys completed by January 21st, and these grades are included under the Problem Set category, along with the grade earned on Problem Set 1. Since we have had no exams yet, I calculated the current (February 1st) course numeric grade using the following equation:

(1) Current (February 1, 2021) Course Numeric Grade = (.10(Class Attendance) +.10(Quizzes) +.20(Problem Sets))/.4

Or course, equation (1) is a special case of the final course numeric grade equation (equation (2) below) which also appears in the course syllabus:

(2) Final Course Numeric Grade =.10(Class Attendance) +.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)}

As the spring semester progresses and I continue to collect grades in the attendance, quiz, problem set, and exam categories, then the course grade on Canvas will dynamically incorporate that information on a timely basis for each student. After I record midterm 1 grades, I will apply equation (3) below (also a special case of equation (2) above) to determine your numeric course grade at that point in time:

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

After I record midterm 2 grades, I will apply equation (4) below (also a special case of equation (2) above) to determine your numeric course grade at that point in time:

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

After I record final exam grades, I will use equation (2) above to determine your final course numeric grade, and (as also noted in the course syllabus), the final course letter grade will be based upon the following schedule of final course numeric grades:

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%

 

Reading and Quiz assignments due Tuesday, February 2 in Finance 4335

Starting this Tuesday, February 2, we begin a series of five class meetings devoted to the topic of decision-making under risk and uncertainty. The reading assignments for Tuesday include the following:

1. Supply of Insurance, by Greg Niehaus, University of South Carolina

2. Basic Economics: How Individuals Deal with Risk (Doherty, Chapter 2)

3. Introduction to Expected Utility and Risk Preferences, by James R. Garven

Earlier today, I uploaded a much larger font version of Doherty’s Chapter 2 which I think might be somewhat easier to read; it is available at http://fin4335.garven.com/spring2021/chapter2lf.pdf if you’d like to give that version a try.

Also, be sure to take Quiz 3 sometime before the beginning of class on Tuesday; it will become available tomorrow at 1:30 pm CT, and will remain available until 2 pm CT on Tuesday.

Z Table Extra Credit Assignment (due 2 p.m. CT on Tuesday, February 2)

Here’s an extra credit opportunity for Finance 4335. Working on your own (i.e., this is not a group project; credit will only be given for spreadsheets that are uniquely your own), build your own “z” table in Excel (patterned after the table located at http://fin4335.garven.com/stdnormal.pdf); the top row should have values ranging from 0.00 to 0.09, and the first column should have z values ranging from -3.0 to +3.0, in increments of 0.1).

Quite conveniently, Excel has the standard normal distribution function built right in; e.g., if you type "=normsdist(z)", Excel returns the probability associated with whatever z value that you provide. Not surprisingly, if you type "=normsdist(0)", .5 is returned since half of the area under the curve lies to the left of the expected value E(z) = 0. Similarly, if you type "=normsdist(1)", then .8413 is returned because 84.13% of the area under the curve lies to the left of z = 1. Perhaps you recall from your QBA course that 68.26% of the area under the curve lies between z = -1; this "confidence interval" of +/1 one standard deviation away from the mean (E(z)=0) is calculated in Excel with the following code: "=normsdist(1)-normsdist(-1)", and so forth.

The grade you earn on this extra credit assignment will replace your lowest quiz grade; that is if your lowest quiz grade is lower than your extra credit grade. The deadline is 2 p.m. CT on Tuesday, February 2.

You can turn your spreadsheet for this extra credit assignment in at https://baylor.instructure.com/courses/132670/assignments/1020516.