Public Service Announcement: some suggestions about rounding in Finance 4335…

I often joke that Finance 4335 is not an accounting class and that it is better to be vaguely correct rather than precisely wrong.  However, now that you have turned in a couple of problem sets in Finance 4335, I would like to offer some suggestions about rounding.

As a general rule, rounding to the nearest hundredth (i.e., two places to the right of the decimal point) when working on class problems, problem sets, and exams should be sufficient.   I am mostly concerned that you learn the intuition and logic behind the models we study.  When correctly applied, this level of “precision” will generally produce numeric results that are reasonably close to the solutions which my TA (Chuck Hooker) and I provide (based on Excel spreadsheets, which by default round out to 16 significant digits ).  However, on Problem 1A in Problem Set 2, we noticed several students rounding to the nearest whole number.  Believe it or not, in finance, a 9% or 5% return is materially (in a real, economic sense) quite a bit (40 basis points) higher than an 8.6% or 4.6% return (8.6% and 4.6% were the answers provided in the solutions for Problem Set 2. Furthermore, many problems in Finance 4335 involve numerical calculations that go through a number of different stages, which implies that a coarse level of rounding (e.g., nearest integer) compounds the difference between your results and ours.  This all makes grading much more challenging and potentially error-prone.

Problem Set 2 helpful hints

Problem Set 2 is available from the course website at http://fin4335.garven.com/fall2020/ps2.pdf; its due date is Tuesday, September 8.

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 returns and standard deviations for 2-asset portfolios. My one-page teaching note entitled “Mean and Variance of a Two-Asset Portfolio” (assigned reading from last Tuesday) provides simple and succinct explanations concerning how to calculate the expected return (equations 1-2) and variance (equations 3-4) of a two-asset portfolio. The second problem involves using the standard normal probability distribution to calculate the probabilities of earning various levels of return by investing in risky securities and portfolios; see pp. 17-23 of the http://fin4335.garven.com/fall2020/lecture4.pdf lecture note for coverage of that topic.

Z Table Extra Credit Opportunity

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), construct a “z” table (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).

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 8 a.m. CT on Tuesday, September 8.

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. This resource provides a convenient means for your professor to distribute important announcements outside of 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.

All students enrolled in Finance 4335 are required to subscribe to the course blog via email.  Students may also follow the course blog on Facebook or Twitter, but are not required to do so.

Email Subscription Instructions:

In order to subscribe to the course blog via email, go to http://risk.garven.com and enter your email address in the form provided on the right-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> ”:

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

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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.