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Biases and Student Portfolio Management Behavior Profiles: An Empirical Taxonomy
No full textMany investment portfolios are managed by individuals. In order to better understand their portfolio decisions, we must understand how cognitive biases might affect behavior in making these decisions. While a simplistic view might only consider an individual’s management effort, a feature-based approach allows us a more developed understanding of portfolio management. To achieve this objective, this paper develops an empirical taxonomy of portfolio management behavior profiles through surveys of 48 undergraduates participating in the Stock-Trak® project. The four management profiles we define in this paper – Resolute, Insecure, Fastidious, and Passive are distinct in terms of behaviors, effort, and perceived success
Bootstrap Simulation with Spreadsheet Application
No full textThis study provides an easy and effective way to simulate distributions of future stock price and return. Using a bootstrapping approach for simulation, we generate one thousand different scenarios for Google\u27s price after one year and the corresponding percentage return. The simulated return distribution provides a comprehensive risk-return profile that includes probabilities associated with achieving a specific return in these uncertain times. We explain and create an excel template showing the bootstrapping simulation that can be readily used in finance classrooms. Using the same methodology, students can conduct their own simulations of different assets and compare their risk-return tradeoffs
Mimic Excel
No full textAlthough Excel is an excellent tool to teach finance, some of its properties really confuse my students, such as its sign convention and no clear explanation accompanying an error message. In addition, typing =fa(0.1,2,0,100) offers no clue about the formula being used. In this short paper, I will replicate several common Excel functions with and without sign convention. The beauty of functions without sign convention is that they come directly from our textbooks. In other words, an exact formula will accompany a result. When typing =rateExcel(3,10,100), we will see the same error message plus a short explanation
Textbook Confessions: Of Failures, Markets, and Government
No full textMost undergraduate students come into contact with an economics class only in passing. The textbook will thus be the basis for their economic understanding, and what is included in these books will have a large influence on how they view the workings of the overall economy. Guided by the Council for Economic Education’s Voluntary National Content Standards, we show that most textbooks cover more extensively market failure than government failure, or even the government role as protector of property rights. We believe a more balanced approach provides an accurate view of the role government should play in a vibrant economy
Financial Literacy in the Community College Classroom: A Curriculum Intervention Study
No full textUrban Community College asked the Federal Reserve Bank of St. Louis to develop a financial literacy curriculum unit for its New Student Course. The unit was taught in 62 randomly selected sections, with 31 of those serving as the control group. We evaluated the effectiveness of the unit based on student pre-test and post-test scores. We found that student pre-test scores, academic ability, teacher experience, and participation in the unit were statistically significant predictors of student post-test scores. On average, students taught the financial literacy curriculum unit scored about 7 percentage points higher than students who were not
Keynesbiscuit, Marketariat, and the Fool in the Shower: Metaphors for Teaching Policy Lags in Macroeconomics Principles
No full textPrinciples of macroeconomics textbooks devote a great deal of space to countercyclical fiscal policy, but generally provide only scant coverage to factors that make its application difficult in the real world. In fact economists are generally skeptical of the ability of fiscal policy to smooth the business cycle because of the policy-lag problem. This paper provides a metaphor—a horserace between active policy and the selfcorrecting mechanism—that can help students move into the higher levels of Bloom’s taxonomy of learning (analyzing, synthesizing, and evaluating) with respect to fiscal policy. The metaphor can be extended to include discretionary monetary policy as well
Increase Interest In Compound Interest: Economic Growth and Personal Finance
No full textCompound interest is in the center of both economic growth and personal finance, but treated as independent topics in most economics textbooks. This educational note first defines economic growth and the main factors behind it. Then, figures and tables are applied to show the power of compounding growth (inflation and purchasing power adjusted) for select countries over the last centuries. Right after, growth future value calculation practice problems follow. After mastering four distinct variants of the compound interest formula, the paper’s focus moves to students and personal finance. The earlier formulas are now used to highlight the significance of long-term investing in one’s financial future. Though economic growth and personal finance are not commonly taught together, this paper shows that these topics can complement each other and that students can gain additional insights into how compound interest is meaningful to their own lives
Robust Analysis: An Investments Class Project on a Shoestring
No full textWe propose an investments class project to help students recognize ways to evaluate the robustness of an analytical result and understand the importance of performing such an evaluation. In the first part of the project, students derive basic results for naïve diversification. Then they apply four methods for evaluating the robustness of their initial conclusions: simple replication, an alternative market proxy in the single-index market model, an alternative asset pricing model (the FamaFrench Three-factor Model), and results from another historical period
The Cost of Underperforming Investments
No full textUnderperforming investments change a firm\u27s equity value, cost of equity, capital structure and cost of capital. We show how to correctly adjust the cost of capital and correctly value a firm with underperforming investments. The correct equity estimate equates the equity value derived from the Economic Profit Model with the equity used to estimate the WACC. We demonstrate how underperforming investments can reduce equity value even though earnings may increase. We confirm our results with the Residual Earnings Model and show that our approach for valuing a company with underperforming investments also works well with investments that increase equity value
Teaching Foreign Exchange Rates: A Primer
No full textGiven the importance of foreign exchange in introductory economics courses, this paper aims at providing a full and intuitive teaching of foreign exchange. First, there is a review of how the major current introductory texts offer somewhat inadequate treatment of the topic. Then, international transactions within a balance of payments framework are explained. Importantly, the market equilibrium exchange rate between the dollar and the euro is concurrently derived. Finally, the paper introduces, within a comparative static framework, changes in exchange rates from changes in major macroeconomic variables: the GDP of trading partners, domestic price level, and real interest rates