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 for the reading assignment due dates, and 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).

The Pursuit

“How can we lift up the world together, starting with those at the margins of society?” This question inspired former American Enterprise Institute President Arthur Brooks to travel around the world seeking answers. Released this spring, his documentary reveals insights into not only alleviating poverty, but also achieving lasting happiness for all.

Now streaming on Netflix @

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 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 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.

Milton Friedman on CEOs

As an antidote to yesterday’s Business Roundtable decision to throw Friedman’s shareholder-centric model under the bus in favor of “… the more politically au courant “stakeholder” model”, The Wall Street Journal editorial board reminds us about Milton Friedman’s famous 1970 New York Times Magazine article entitled “The Social Responsibility of Business is to Increase its Profits” (linked to in this article and also from

The late, great economist anticipated the Business Roundtable.

On the relationship between the S&P 500 and the CBOE Volatility Index (VIX)

Besides going over the course syllabus during the first day of class on Tuesday, August 27, we will also discuss a particularly important “real world” example of financial risk. Specifically, we will look at the relationship between stock market returns (as indicated by daily percentage changes in the SP500 stock market index) and stock market volatility (as indicated by daily percentage changes in the CBOE Volatility Index (VIX)): As indicated by this graph from page 21 of the lecture note for the first day of class, daily percentage changes on closing prices for VIX and the SP500 are strongly negatively correlated. In the graph above, the y-axis variable is the daily return on the SP500, whereas the x-axis variable is the daily return on the VIX. The blue points represent 7,465 daily observations on these two variables, spanning the time period from January 3, 1990 through August 16, 2019. When we fit a regression line through this scatter diagram, we obtain the following equation:

{R_{SP500}} = 0.0588 - 0.1129{R_{VIX}},

where {R_{SP500}} corresponds to the daily return on the SP500 index and {R_{VIX}} corresponds to the daily return on the VIX index. The slope of this line (-0.1129) indicates that on average, daily VIX returns during this time period were inversely related to the daily return on the SP500; i.e., when volatility as measured by VIX went down (up), then the stock market return as indicated by SP500 typically went up (down). Nearly half of the variation in the stock market return during this time period (specifically, 48.87%) can be statistically “explained” by changes in volatility, and the correlation between {R_{SP500}} and {R_{VIX}} comes out to -0.699. While a correlation of -0.699 does not imply that {R_{SP500}} and {R_{VIX}} will always move in opposite directions, it does indicate that this will be the case more often than not. Indeed, closing daily returns on {R_{SP500}} and {R_{VIX}} during this period moved inversely 78.43% of the time.

You can see how the relationship between the SP500 and VIX evolves prospectively by entering^GSPC,^VIX into your web browser’s address field.

Calculus and Probability & Statistics recommendations…

Since many of the topics covered in Finance 4335 require a basic knowledge and comfort level with algebra, differential calculus, and probability & statistics, the second class meeting during the Fall 2019 semester will include a mathematics tutorial, and the third and fourth class meetings will cover probability & statistics. I know of no better online resource for brushing up on (or learning for the first time) these topics than the Khan Academy.

So here are my suggestions for Khan Academy videos which cover these topics (unless otherwise noted, all sections included in the links which follow are recommended):

Finally, if your algebra skills are generally a bit on the rusty side, I would also recommend checking out the Khan Academy’s review of algebra.

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:

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:

Finance 4335