Some helpful hints for preparing for Midterm Exam #2

The second midterm exam for Finance 4335 will be given in class on Tuesday, November 13.? It consists of 4 problems worth 24 points each (you get 4 points for writing your name on the exam booklet and turning the exam booklet in ).

The questions involve the topics which we have covered since the first midterm.? There is a problem on the demand for insurance by a risk averse person, as well as a problem which requires you to figure out an insurer?s business strategy for preventing adverse selection from occurring.? There is a third problem that blends together the portfolio theory and capital market theory concepts.? Finally, the fourth problem involves pricing a single time-step option and also figuring out its replicating portfolio.?

My advice on working the exam is to always opportunistically take advantage of ?shortcuts? if and when you encounter them.? For example, hopefully it?s?apparent that from the insurer?s perspective, preventing adverse selection means that you limit contract choices such that you do no worse than break even on any given insured.? Similarly, keep in mind other shortcuts, like the insurance demand concept (i.e., the so-called ?Bernoulli principle?) that when insurance is actuarially fair, it?s optimal for the insured to fully insure, and that the standard deviation of a coin toss can be calculated by determining the total dispersion between state contingent outcomes and dividing by 2.

I have posted the formula sheet that will be?included as part of?the exam booklet at ?I plan to use on the exam at the following location: http://fin4335.garven.com/fall2012/formulas_part2.pdf.? I have also concatenated all of the handwritten lecture notes since the first midterm into one?59 page file.? Hopefully you will find this to be a helpful study aid.? Go to http://fin4335.garven.com/dropbox/Finance%204335%20Lectures,%2010-9%20through%2011-8.pdf.

Finally, feel free to call me @ 254?307?1317 during ?normal? business hours (i.e., 9?5) on Monday, November 12 in case if you have any questions or concerns related to the midterm exam.? See y?all on Tuesday, and good luck!

Source: http://risk.garven.com/2012/11/10/some-helpful-hints-for-preparing-for-midterm-exam-2/

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