Tuesday, February 21, 2012

How Much To Teach

As a Ph.D. student at a public university, I am obligated to teach. Many seem to assume this just means TA responsibilities, but I'm actually the instructor of record for a class of 50: I choose the material to be covered, and I alone assign those oh-so-important grades. This semester, as with last spring, I am teaching financial management, the core finance course that must be taken by all business undergrads.

The course is supposed to be an introduction to both investments and corporate finance. I work primarily in empirical asset pricing, so naturally I like to dig deeper on the investments topics. Friday marked the end of the chapters on the most important investments material we will cover, culminating with an explanation of the Capital Asset Pricing Model (CAPM) and sample applications. What we did not cover, however, was a rigorous explanation of where CAPM comes from and how to derive it.

To be fair, no sophomore-level introduction to finance course would cover the derivation of CAPM. (Of course, I am talking about the derivation that follows from William Sharpe's 1964 Journal of Finance paper, "Capital asset prices: A theory of market equilibrium under conditions of risk", not the stochastic discount factor-based derivation taught in finance PhD programs) At my school, the relevant course is the aptly-titled "Investments" (which incidentally I will be teaching next year). So, if students are going to learn how to derive CAPM in investments, what's the big deal? For one, most of my students won't take investments, but there's a larger pedagogical question at hand.

The lecture ended about 20 minutes early; I had finished covering the material that would be on the students' next test. Part of me wishes I had spent that 20 minutes giving the students a crash course in CAPM derivation, but realistically, it just would have been a jumbled mess. Even a rudimentary explanation of Sharpe requires an understanding of the efficient frontiers from Harry Markowitz's 1952 Journal of Finance paper, "Portfolio selection." Alas, students do not (need to?) see efficient frontiers in the core course.

(As a sidenote, both Markowitz and Sharpe are Nobel Laureates, based in part on the work in those papers)

Of course, I could have structured things to leave a full class session for Sharpe and CAPM, but I could not reasonably test them on the material since, as mentioned, it's really the domain of the investments elective, and for those who miss the class, it's certainly not in the textbook. What, then, is the point of losing an entire class session in the name of "education" when the majority of my students aren't even finance majors?

There's a very small chance that some undeclared business students might be moved by the elegance of CAPM and decide to declare as a finance major; there's also a very small chance that I'll win the lottery. Then again, maybe that's not the proper metric of success as a teacher. Trying to inspire all my students may not necessary (or even desirable) if I can inspire just one who goes on to do great things; for everyone else, perhaps it is sufficient that I simply prepare them for their first job out of college.

For what it's worth, yesterday the students took the aforementioned test, and they performed very well on the CAPM section.

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