Spring 2019 Course Announcement – Finance 4366: Options, Futures and Other Derivatives

Here’s the “prospectus” for the Finance 4366 “Options, Futures and Other Derivatives” course that I will be teaching during the upcoming  Spring 2019 semester; if you click on the image, this will bring up a full-page PDF version. If you have been enjoying Finance 4335 this semester, I hope you’ll consider enrolling in Finance 4366 this spring!

Empirical evidence of risk aversion in the real world: Small stocks, Large stocks, Government bonds, and Treasury bills, 1926-2017

Although there may be various social contexts in which people stray from risk averse behavior (e.g., the risk loving behavior which is on display whenever people place bets on gambles with unfair odds), in other (more economically consequential settings), it does appear that risk averse behavior is more the rule rather than the exception. Indeed, risk aversion is what motivates people to buy insurance and diversify risk in their asset holdings.

The financial markets provide us with a superb example of risk averse behavior writ large. Historically, here are the long run (1926-2017) compound annual returns on stocks, bonds, and bills that are traded in U.S. financial markets (source: page 9 of http://bit.ly/sbbi2018):

Risk for these various asset classes is lowest for Treasury bills, a bit higher for Government bonds, a bit higher yet for Large stocks, and highest for Small stocks. If you are risk averse, then if one asset has higher risk than another, you are not willing to invest in the riskier asset unless you can reasonably expect that on average, you’ll be compensated for bearing the extra risk in the form of a higher expected return, and it turns out that this is exactly what happens in the real world. If investors were to act in a risk neutral fashion, then the average returns wouldn’t be all that different from each other. Finally if investors were to act in a risk loving fashion, they’d pay more for risky assets than for safe; this would cause risky assets to be bid up in value relative to safe assets, which in turn would imply lower average returns for risky than for safe assets.

Midterm Exam 1 hints and formula sheet

I just posted the formula sheet for the exam at http://fin4335.garven.com/fall2018/formulas_part1.pdf. It is also linked as the first item on the formula sheets page on the course website.  This is identical to the formula sheet which will be attached to the exam booklet.

The exam consists of a total of 4 problems. The first problem is required, and you are also required to work 2 out of the 3 remaining problems on the exam (i.e., select two problems from Problems #2-#4). At your option, you may work all three of Problems #2-#4, in which case I will count the two problems with the highest scores toward your grade on this exam. Each of the graded problems is worth 32 points, so as a “bonus” I’ll add 4 points for including your name on the exam. Thus, the total number of points possible is 100.

Regarding content, the exam is all about stuff that we covered since the beginning of the semester; specifically, risk preferences, expected utility, certainty-equivalent of wealth, risk premiums, and stochastic dominance.

Finance 4335