Opinion in public education system

I read Dwayne’s and Amber’s article that it says U.S has poor education system, and the U.S should spend money on education system to boost, and this will not let the U.S have this kind of financial crisis. Before the U.S spends their money on education system, the U.S needs to know what the main problem the U. S is having, and how they will solve them. Both Dwayne and Amber mentioned lots of thing about problems in education system, but I do not agree with that the lack of concern for student at a college is also one of the problems in the education system, but I think the U.S should concern about K-12 first, then it is not late to solve the problem in the university education system. Thus, I think the U.S should focus on K-12 first.
According to the Programme for International Student Assessment (PISA), it tests math, science, and readings to 15 year-old students, and 57 countries participate for this. The U.S is ranked 30th in science 34th in math out of 57 countries, and the U.S had problem with collecting data for reading section, so their ranks are omitted. As we see that data, the U.S education is below the average. Finland is ranked 1st in overall, so the U.S tried to benchmark the Finland’s education systems. Finland primarily focuses on readings, the 61% of elementary student in Finland read newspapers, and these could be school newspaper, or regular newspaper. In addition, the school provides more chance to debate with classmates. Thus, it makes each student has his or her own thought on the topics. Second, Finland spends lots of money on teacher’s salaries. It does not mean that the teacher’s salary is just high. To be a teacher in Finland, the teacher should be qualified for their high standard of requirements, so the every teacher is well trained. Third, the school provides classes for each student’s level, so if a student A is not good at math, the school provides lower level of math class for student A, and similar students. If a student B is good at science, the school provides advanced science class for student B. However, interest thing is most students in Finland are not embarrassed even though they get into lower level classes.
In conclusion, if the U.S spends money for the qualified teacher, more libraries, variety levels of classes, the U.S’s education system will be improving fast. Even though the U.S spends more money on education system, the result would not come out immediately, but the great result would come out after ten years from now. Thus, I think the spending money on education is the one of the U.S government’s long-term risk management.

http://dwang9.blogspot.com/2009/03/public-education-system.html

http://rmi4350.blogspot.com/2009/03/problems-with-public-education-system.html

http://www.newsweek.com/id/175894

http://www.pisa.oecd.org/document/2/0,3343,en_32252351_32236191_39718850_1_1_1_1,00.html

Adverse selection vs. Moral Hazard

Adverse selection and Moral Hazard contain similar meaning that both use insurance with malicious intent. Also, the adverse selection and moral hazard contain the information asymmetry. However, the both take different approach.

In adverse selection case, people who have high risk in certain thing, such as high risk in eyes, legs, death, etc, pay same premium with standard people and get same amount of insurance payment. Underwriting could distinguish that and set new premiums for the certain people. However, most of time it is hard an underwriter to distinguish whether he or she needs a higher premium than standard people. For example, people who play soccer 4 times a week and they plan to buy insurance with their legs. They have higher probability to be injured with their legs compare to standard people, and the people who play soccer pay same amount of premiums as the standard people pay unless the people tell that they play soccer four times a week. I do not think that is fair.

In moral hazard case, for example, people buy health insurance that covers certain amount of hospital fees if the people stay in hospital for four days or more. Let’s assume the people are injured very light, and a doctor recommends them to stay in hospital a day or two, but the people would tell the doctor that they do not feel good and want to stay two more days, so they can get insurance payments. I think because of adverse selection and moral hazard, the insurance companies’ underwriting policies becoming more complicated.

http://en.wikipedia.org/wiki/Moral_hazard
http://en.wikipedia.org/wiki/Adverse_selection

Freezing salary is not the good way to manage a firm or business

Money gives the greatest power in the capitalism, and we are living in the capitalist economy. In the economic recession period, many firms lay off their employees, and freeze their salaries. I read a Jon’s article (http://enterpriserisk-jonf.blogspot.com/2009/02/salary-freezes.html) that he said freezing salary is the one of best ways to make a firm or business secure. However, I think the freezing salary would not make any difference. In the economic recession period, many firms focus not to lose their profits, and want to keep their assets. It means many firms prefer security in the economic crisis. There are three actions the firm should take in the economic crisis, and those are promoting employees, recruiting new employees, and preparing for an economic boom.

First, it is hard for firms to increase their employees’ salaries, and most firms freeze their salaries. However, incentive system is the one of best ways to overcome current period. If a firm promotes certain employees, and increases their employees based on accurate evaluation, the incentive system encourages other employees to work better and harder. The incentive system is needed, especially in economic recession period.

Second, this is time to recruit new qualified employees and think about to lay off unqualified employees. Most of the time the firm and current employees refresh themselves with new qualified employees. Thus, the new qualified employees could give positive effect on the firm in economic recession period. Nevertheless, the unqualified employees could affect negatively to firm, so economic recession period could be the good time to recruit new qualified employees.

Last, economy goes up and down periodically, but people do not know when the economic crisis will end. In addition, it is hard to take an action, such as starting a new project. Thus, firms should be prepared for an economic boom. To be prepared, the firms should scout for new talent. As I talked about earlier that recruit new qualified employees is the important factor in the economic recession period. Thus, the firm should train them well, and be ready to take an action in economic boom.

http://www.onlinebusadv.com/?PAGE=176
http://dhanil.blogspot.com/2008/10/how-to-overcome-economic-crisis.html

Opinion in AIG bonus

There are many newspaper articles talk about AIG bonus, and 99% of articles conclude that AIG’s action was totally wrong. I read a Dwayne’s article(http://dwang9.blogspot.com/2009/03/aig-bonuses.html) about AIG bonus that AIG’s action was wrong. I partially agree with Dwayne, but I am writing this journal to advocate AIG. When I read the article about AIG, I knew that there were reasons why AIG pays bonus with bailout money.

The first reason was that the AIG had to perform its contract that says $55 million should be paid in last December, and 165 million should be paid on March 13, 2009. Thus, if AIG is able to pay bonus even if the money was bailout money, the 400 employees had a right on their bonus, and wanted to get those. Some employees might sue AIG if AIG did not perform the contracts.

The second reason is that if AIG pays salaries with bailout money, nobody would complain about that. This is the point that once the bonus is officially stated in the contract, the bonus should be considered as salary.

Last, a lack of regulation on bailout money makes the AIG use bailout money whatever AIG wants. When the U.S government supports AIG with bailout money, which is our taxes, the U.S should have regulated with that money, and asked AIG to disclose everything that related with the bailout money. However, the U.S government’s action was too late. Now, the new bill, which is 90% of bonus would be taxable to the federal and the rest of 10% would be taxable to the state, passed from the U.S Congress. Even though the U.S government owned 80% of shares of AIG, the lack of concern and regulation made AIG to waste that bailout money on paying bonus.

In conclusion, before people criticize about AIG I recommend them to think about why the AIG has to take that action. Then, people would not take an action emotionally, and they would not be one-sided. Thus, their critique would be more accurate.

http://www.nuwireinvestor.com/blogs/investorcentric/2009/03/niceaig-is-paying-165-million-to-people.html

http://thecaucus.blogs.nytimes.com/2009/03/16/rep-frank-joins-chorus-on-aig-bonus-outrage/

http://bzt-inside.tistory.com/809?srchid=BR1http%3A%2F%2Fbzt-inside.tistory.com%2F809

Agree with what President Obama is doing

I do not agree with professor Grace thought that President Obama seems not to care about the U.S economy and, that makes the stock market go down. President Obama is focusing on health care, renewable energy, and education. According to washington post, the U.S increase its budget on health care, renewable energy, and education by 22 billion, 39 billion, and 81 billion respectively for year 2009. Spending huge money on those do not seem to help current the U.S eocomy and stock market. However, President Obama has reasons, and they are failing of bailout program, controlling inflation, and looking ahead in long-term perspective.
First, big auto companies such as ford, chrysler, GM were asking for a bailout program, ,but the bailout program would work for thoses companies for very short-term period. In addition, those companies would ask another bailout program unless they solve long-term problems. That is the reason why President Obama wants to stop bailing out, and he wants to spend that money on health care, renewable energy, and education. Second, even though the U.S economy is facing shor-term pain, the U.S should set a goal for a long-term. If the U.S spend more money on education, our future generations are less likley to make this kind of the worst situation. Even if they have the worst economic situation they will cope with those difficulties well. By spending money on renewable energy, the U.S could control its inflation. When the oil price goes up, other prices would also go up soon, so the inflation depends upon the change in energy sector. Thus, if the U.S could make the energy prices stable, the U.S could control its inflation. Also, when people research more on renewable energy, they need more people to work with them, and it will create more jobs. In addtion, those active works would increase the prices of energy sector in stock maket. When the economy is unstable, people tend to rely more on insuraces. Thus, President Obama wants to help people, especially poor people to have their insurances. I think every moves that President Obama makes has a reason. Thus, I recommend people to give him more time, and do not push him.

http://www.businessweek.com/bwdaily/dnflash/content/mar2009/db20090313_686911.htm
http://www.bloomberg.com/apps/news?pid=20601068&sid=asxecTzJN6iM&refer=home
http://www.vheadline.com/readnews.asp?id=78007
http://www.bloomberg.com/apps/news?pid=20601070&refer=home&sid=aA0XK8TY8HYs
http://www.washingtonpost.com/wp-dyn/content/story/2009/02/26/ST2009022601696.html

Importance of risk management in stock investments

There are two main reasons why investors need to manage their risks in a stock market, ant those are the risk management finds investors’ own styles and gives more chance to win in the stock market. The systematic risk could be overcome by long-term investments, and the non-systematic risk could be overcome by diversification. These are the two basic ways to manage risks in the stock market. In addition, a writer Mr. Kim, who is a professional financial planner, mentioned about a diversification method that when the investors diversify their portfolios, their stocks should be negatively correlated. Therefore, if one stock goes down, the other stock may go up. This is the basic way to diversify your portfolio. By the way, I think that it is a good risk management for the individual investors that let the fund manager can take care of their stocks, if the individual investors are not sure to win in the stock market. In addition, investing stock is too stressful for individual investors because they might have their own jobs, and families. Therefore, they have limited time to watch their portfolios, but the most individual investors tend to spend too much time on real-time graphs and value of stocks. Even though the individual investors made huge profits on their investments, that way may stress them physically and mentally. Thus, choosing right risk managements in the stock market is important.
In conclusion, if investors are worried about investment in stock market, let the fund managers do it. If investors want to learn the investment by doing their own, then follow those two basic methods, which are investing in long-term, and diversification. Again, when the investors diversify their portfolios, they should choose stocks, which are negatively correlated, so they would not lose a lot in the worst situation.

http://blog.daum.net/kwh4097/11300167?srchid=BR1http%3A%2F%2Fblog.daum.net%2Fkwh4097%2F11300167

Correlation

When a firm estimates about two new projects whether the firm should take both or not, the firm calculates its variance, expected value from the new projects, and volatility. To get those, the firm needs to get the correlation between the two new projects, and we call the correlation as “rho”. If the rho is a positive number, the each new project has positive effects on each other. For example, if a project A and a project B have rho 0.88, it means if the project A is succeed on its projects, then the project B is more likely to be succeed on its project. However, the rho cannot be more than positive 1 and less than negative 1. If the project A and B have a rho –0.88, it means the each project has negative effects on each other. For example, if the project A is succeed on its project, then the project B is more likely to fail in its project. If the rho is 0, it means they are not correlated each other, so the one project does not dependent on the other.
I think if a firm is thinking to start two or three new projects, the best scenario is open those three projects successfully. Thus, the firm should consider correlated between those projects whether those projects correlated positively, negatively, or uncorrelated. If those are correlated positively, it is easy to manage those projects together.

http://en.wikipedia.org/wiki/Correlation_(in_statistics)

Liquidity is an important key in economic depression period

Current ratio measures whether a company has enough money to pay its liabilities over 12 months period, and it is calculated by current assets divided by current liabilities. For example, company A has $2 million of current assets, and $1.5 million of current liabilities. Then, company A’s current ratio would be 1.3333:1. It means that company A has 1.3333 dollar of assets when it has a dollar of debts. In addition, a recommended current ratio for any company would be the 2:1; it means the company has twice more assets than its debts. Thus, we can conclude that company is very secure. However, if the current ratio is too high, it does not mean that the company manages its capital wisely. The reason is that if the company’s assets are too much, which is more than double, relative to its liabilities, it means the company does not use its assets efficiently. The company could invest or start a new project with those assets. If a company’s current ration is less than 1, it does not mean that the company is facing shortfall in its cash. The reason is that the company’s inventory turns over quickly, and its cash keep flowing such as grocery stores and fast food restaurants, so the current ratio could become less than 1. People have two perspectives on low current ratio. One is that the company uses its assets efficiently, and other perspective is that the company manages its capital so risky. In conclusion, if a company tries to use its assets fully, and it invests and starts a new project with its assets, its current ratio would be low. In addition, if the company tends to keep money instead of investing or starting a new project, its current ratio would be high. However, we cannot conclude which company is better than the other.

http://en.wikipedia.org/wiki/Current_ratio

A changed world for Financial Advisers

A financial planner, Frank Boucher, has been thrown into despair about financial systems and markets that how those crashed so quickly. He also mentioned that investment the method, “diversification”, did not work in this financial crisis. Bonds are not exceptions. However, we can learn from this depression period. Mr. Boucher recommended that the people who invest in real estates and stock convert to cash or Treasuries. This is a basic idea that if people hold their stock for long-term, their risky would go down. However, most companies’ stocks were cut half in 2008. I think the financial market is like a highway and the car is an investor. The reason is that if it raining, storming, and snowing, every car drives slowly. If an investor wants to make huge profits on this depression period, the investor should take a risk, but if the investor fails on his or her investment, he or she will lose a lot. This is same a driver who is willing to get his or her destination fast in snowy days. The driver could get his or her destination much faster than the others if he or she takes a risk, which means the drivers goes fast. However, if the driver has an accident while he or she driving in snowy days, the accident would be much bigger than accident in regular days. That’s why Mr. Boucher recommends investors to keep cash instead of taking aggressive approach in the stock market.

http://www.businessweek.com/investor/content/feb2009/pi20090210_191817.htm

RAROC

RAROC estimates probability of a firm’s profits on its investment, and RAROC also adds expected risks rates into calculation, so RAROC could measure more realistic value. There are three basic risks, and those are market risk, credit risk, and operational risk. RAROC is an upgrade version of ROC since ROC measures without adding expected risk rates into calculation. RAROC was developed by Bankers Trust in 1970. The main purpose of the RAROC is to set optimal amount of capital to hold while a firm is investing in a new project. There are two reasons RAROC to allocates capital, the one is risk management, and the other is evaluation. RAROC is calculated by expected return divided by economic capital. The economic capital is similar as VAR. It measures the amount of capital a firm needs in the worst situation. Economic capital is little different from regulatory capital. The regulatory capital is the minimum amount of money, which regulators require to have. However, economic capital the amount of money for companies’ the worst case scenarios.
I think it is very hard to expect those three risks, market risk, credit risk, and operational risk, also hard to average and compare those tree risks. The reason is that equality of certain value of market risk is different from credit risk, and operational risk. For example, if market risk is 2, we do not know whether the value, 2, of market risk works same in the credit risk or operational risk. I think to increase accuracy of RAROC, we need to focus on accuracy the three value of risks to be reasonable and acceptable.


http://www.riskglossary.com/link/economic_capital.htm

http://www.12manage.com/methods_raroc_ko.html