# Plans for next week’s Finance 4335 class meetings, along with a preview of future topics

We will devote next week in Finance 4335 to tutorials on probability and statistics. These tools are critically important to in the measurement of risk and development of risk management strategies for individuals and firms alike. Next Tuesday’s class meeting will be devoted to introducing discrete and continuous probability distributions, calculating parameters such as expected value, variance, standard deviation, covariance, and correlation, and applying these concepts to measure expected returns and risks for portfolios comprising risky assets. The following Thursday will provide a deeper dive into discrete and continuous probability distributions, in which we showcase the binomial and normal distributions.

While I have your attention, let me briefly explain what the main “theme” will initially be in Finance 4335 (up to the first midterm exam on Tuesday, October 1). Starting on Tuesday, September 10, we will begin our discussion of decision theory. Decision theory addresses decision making under risk and uncertainty, which at the very heart of risk management. Initially, we’ll focus attention on variance as our risk measure. Most basic finance models (e.g., portfolio theory, the capital asset pricing model (CAPM), and option pricing theory) implicitly or explicitly assume that risk = variance. We’ll learn that while this is not necessarily an unreasonable assumption, circumstances can arise where it is not an appropriate assumption. Since individuals and firms encounter multiple sources of risk, we also need to take into consideration the portfolio effects of risk. Portfolio theory implies that risks often “manage” themselves by canceling each other out. Thus the risk of a portfolio is typically less than the sum of the individual risks which comprise the portfolio.

The decision theory provides a useful framework for thinking about concepts such as risk aversion and risk tolerance. The calculus comes in handy by providing an analytic framework for determining how much risk to keep and how much risk to transfer to others. Such decisions occur regularly in daily life, encompassing practical problems such as deciding how to allocate assets in a 401-K or IRA account, determining the extent to which one insures health, life, and property risks, whether to work for a startup or an established business and so forth. There’s also ambiguity when we have incomplete information about risk.  This course will at least help you think critically about costs, benefits, and trade-offs related to decision-making whenever you encounter risk and uncertainty.

After the first midterm, the rest of the semester will be devoted to various other risk management topics, including the demand for insurance, asymmetric information, portfolio theory, capital market theory, option pricing theory, and corporate risk management.

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

At any point in time this semester, you can ensure that you are on track with Finance 4335 assignments by monitoring due dates on the course website. See http://fin4335.garven.com/readings/ for the reading assignment due dates, and http://fin4335.garven.com/problem-sets/ for the problem set due dates.  Also, keep in mind that I will administer short quizzes in class on each of the dates shown for required readings.

# Lagrangian Multipliers

There is a section in the assigned “Optimization” reading due Thursday, 8/29 on pp. 74-76 entitled “Lagrangian Multipliers” which (as noted in footnote 9 of that reading) may be skipped without loss of continuity. The primary purpose of this chapter is to re-acquaint students with basic calculus and how to use the calculus to solve so-called optimization problems. Since the course only requires solving unconstrained optimization problems, there’s no need for Lagrangian multipliers.

Besides reading the articles entitled “Optimization” and “How long does it take to double (triple/quadruple/n-tuple) your money?” in preparation for this coming Thursday’s meeting of Finance 4335, make sure you complete the student information survey and subscribe to the course blog (if you haven’t already done so).

# Textbook for Finance 4335

The textbook for Finance 4335 is entitled “Integrated Risk Management: Techniques and Strategies for Managing Corporate Risk”. Here’s how the Baylor Bookstore lists this title:

While the Finance 4335 textbook is “out of stock” at the Baylor Bookstore, this book is available for purchase from Amazon.com as well as various other online booksellers. Alternatively, you may also download and print assigned chapters from the course website.

I supplement Doherty’s book with readings from various other sources, as well as readings which I have authored. See http://fin4335.garven.com/readings/ for a date-ordered list of reading assignments. Since the first reading assignment from the textbook isn’t due until Tuesday, September 10, y’all have plenty of time to order the book online, or if you prefer, source textbook readings from the course website.

# How to obtain a Wall Street Journal subscription

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:

# 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, 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:

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.