Homework 4 - Emilie Gein Rec #002 Jahiz Barlas Homework #4...

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Emilie Gein Rec #002 Jahiz Barlas Homework #4 1. Because information about future events are unknown the risk is the uncertainty about future income. The law of diminishing marginal utility means consumers are risk averse. Being risk averse means a person is willing to expend more resources to avoid losing $1000 than willing to expend to gain $1000. b. The efficient market hypothesis says that asset prices embody all publicly available information, therefore stock prices change only when new information is released. Since new information isn’t predictable the market will follow a random walk. The irrational market hypothesis leads to the belief in “market timing” buying stocks when they are underpriced and selling them when they are overpriced 2. a) Russia buys 100 million in US government bonds. Investment in a financial asset, because bonds are financial assets. b) In 2001 Charlize buys a 10 million house built in 1970. Her intention is to re-sell it in 2003, not to live in it. Investment in a physical asset, because a house is a physical asset that is used therefore cannot add to the GDP, and because she is not living in it its not consumption based. c) A firm buys 10 new computers replacing 7 old ones. Investment, because it is the purchase of new
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Homework 4 - Emilie Gein Rec #002 Jahiz Barlas Homework #4...

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