# Erratum – new version of problem set 8 now available at http://fin4335.garven.com/spring2018/ps8.pdf

One of your fellow classmates (who will remain unnamed :-)) pointed out to me that as originally written, problem set 8 asked for solving the value of a call option using the delta hedging approach.  Since I did not cover delta hedging, I have modified the problem (just moments ago) so that it now asks for calculating call and put values using replicating portfolio and risk neutral valuation approaches.  So if you have previously downloaded the problem set before now, delete that copy and re-download the corrected version, which looks like this:

# Problem Set 7 helpful hints

Problem Set 7 is due at the beginning of class on Tuesday, March 20.  Here are some helpful hints:

1. The least risky combination of Security A and Security B in Problem 1 is found by calculating ${w_A} = \displaystyle\frac{{\sigma _B^2 - {\sigma _{AB}}}}{{\sigma _A^2 + \sigma _B^2 - 2{\sigma _{AB}}}}$ and ${w_B} = 1 - {w_A}$.
2. It will always be the case for 2 security portfolios that by following the minimum variance portfolio weighting scheme in the previous bullet point, such a portfolio must have zero variance if ${\rho _{AB}} = 1$ or -1.
3. In part B of Problem 2, the Sharpe Ratio for security j is $\displaystyle\frac{{E({r_j}) - {r_f}}}{{{\sigma _j}}}$.

# Problem Set 6 Hints and Spreadsheet (mea culpa)

My bad… I wrote the following not right before spring break and forgot to post it.  If y’all are having problems solving question 1, part C, you’ll find the following information quite helpful.  Also, I am pushing the due date for problem set 6 back to this Thursday; however, you’re welcome to turn it in if you like…

So here goes – In question 1, part C of Problem Set 6, I ask you to “Find the maximum price which the insurer can charge for the coinsurance contract such that profit can still be earned while at the same time providing the typical Florida homeowner with higher expected utility from insuring and retrofitting. How much profit will the insurer earn on a per policy basis?” Here are some hints which you’ll hopefully find helpful.

# Clarification of Problem Set 5 requirements

Problem Set 5 is due at the beginning of class on Thursday.  You may solve it analytically (via the calculus) or by making appropriate modifications to the Bernoulli and Mossin Spreadsheet (or better yet, writing your own spreadsheet code from scratch).  Even better yet, solve the problem set analytically and confirm your results with a spreadsheet model.

If you decide to use a spreadsheet rather than calculus to solve this problem set, then you are required to email a copy of your spreadsheet to risk@garven.com; your problem set answers should reference the spreadsheet so that the source for your answers can be verified.

# New due date for problem set 5

Problem set 5 will now be due on Thursday, March 1 rather than today.

# Problem Set 2 helpful hints

Problem Set 2 is now available from the course website at http://fin4335.garven.com/spring2018/ps2.pdf; its due date is Thursday, January 25.

Problem Set 2 consists of two problems.  The first problem requires calculating expected value, standard deviation, and correlation, and using this information as inputs into determining expected return and standard deviation for 2-asset portfolios.  We covered these concepts during last Thursday’s statistics tutorial; also see pp. 10-20 of the http://fin4335.garven.com/spring2018/lecture3.pdf lecture note.  The second problem involves using the standard normal probability distribution to calculate probabilities of earning various levels of return by investing in risky securities and portfolios.  We will devote next Tuesday’s class meeting to this and related topics.

# 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.

# 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.