"Financial institutions are a pillar of civilized society, directing resources across space and time to their

best uses."

Finance is a technology; it can be used for good or evil. It has a tendency for a successful practitioner to
start attracting a lot of money.

Andrew Carnegie was one of the richest men in America. He said that he thinks that rich people, people
who succeed in business. And the business world selects for people with this natural talent. And so,
when they make a lot of money it is their obligation to give it away for the benefit of society and not to
their useless children or spoiled children.

Carnegie said is you have to retire early. And become a philanthropist that's the second stage of your
life.

VaR: 'Value at risk' and it's a measure used by some finance people to quantify risk of an investment or
of a portfolio and it's quoted in units of dollars for a given probability and time horizon.

For example, if it says an asset has a 3% one-month VaR of 2%, representing a 3% chance of the asset
declining in value by 2% during the one-month time frame

Stress test: Method of assessing risks to firms or portfolios. The idea of a stress test is that, let's look at a
portfolio not just by its historical returns and how variable they are, but let's look at the details of the
portfolio and ask what vulnerabilities there are for various kinds of financial crisis. The stress test is a
test usually ordered by government to see how some firm will stand up to a financial crisis.

The Dodd-Frank Act in the United States of 2010 requires the Federal Reserve to do annual stress tests
for non-bank financial institutions it supervises. What they would do is, they would get information from
the firm about all of their interconnectedness with other institutions, everything they own, how safe is
it, and they would look at, say for example, what would happen if there were a severe recession, or
what would happen if the dollar depreciated or appreciated, or what would happen if there's a short
term liquidity crisis with suddenly ability to borrow money in the short term dries up.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed into Federal law on July
21, 2010 as a response to the financial crisis of 2007 to 2008. This Act constitutes the most significant
changes to U.S. financial regulation since the regulatory reform that followed the Great Depression.

The Dodd-Frank Act didn't specify what the three different scenarios were, but they did say that there
should be at least three.

Anat Admati is a professor at Stanford who's been arguing it's all garbage. Generally, the stress test
come out saying it's okay, don't worry.

If I were the CEO of a firm, I imagine I would ask for stress tests and doing it internally, but you don't
want it public. The Dodd-Frank Act gave regulators, the Office of Financial Research subpoena power, so
they can go in there and demand information from firms. But it's hard to get it I think. In the real world
it's a battle. They don't want to tell you.

S&P, Standard & Poor's 500 stock price index and it's used as a benchmark for returns

Problem with investing is that no one knows what will happen in future
investing is puzzling because the noise dominates.

Beta of a stock: Measure of how it relates to the stock market.

Market risk: the risk of the whole stock market

Idiosyncratic risk: Apple only risk.

Beta= Variance/Covariance

where: Covariance=Measure of a stock’s return relative to that of the market

Variance=Measure of how the market moves relative to its mean

An investor is looking to calculate the beta of Apple (AAPL) as compared to the SPDR S&P 500 ETF Trust
(SPY). Based on recent five-year data, the correlation between AAPL and SPY is 0.83. AAPL has a
standard deviation of returns of 23.42% and SPY has a standard deviation of returns of 32.21%.

Beta of AAPL= 0.83 * ({0.2342}/ {0.3221}) = 0.6035

CAPM= Doesn’t factors in unsystematic risk as it can be controlled by the investors by diversification

Required rate of the return on a stock= Rf+ β(Rm-Rf)

(Rm-Rf)= Market Risk premium

β(Rm-Rf)= Security Risk premium