Charlee_CH_4 - FIN MKTS: Chapter 4 Why do Interest Rates...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
FIN MKTS : Chapter 4 – Why do Interest Rates Change? I. Determinants of Asset Demand a. Asset : piece of property that is a store of value b. Why buy one asset over another? Consider the following factors : i. Wealth : the total resources owned by the individual, including all assets 1. increase in wealth raises the quantity demanded of an asset ii. Expected Return (return expected over the next period): on one asset relative to alternative assets 1. expected return on an asset is the weighted average of all possible returns, where the weights are the probabilities of occurrence 2. increase in an asset’s expected return relative to that of an alternative asset raises the quantity demanded of the asset iii. Risk (degree of uncertainty associated with return) : on one asset relative to alternative assets 1. standard deviation: measure of risk; higher std deviation = higher risk (calc: p73) 2. if an asset’s risk rises its quantity demanded will fall iv. Liquidity (ease and speed with which an asset can be turned into cash): relative to alternatives 1. the more liquid an asset, the more desirable it is, and the greater will be the quantity demanded c. Summary: i. Quantity demanded of an asset is usually positively related to wealth, with the response being greater if the asset is a luxury than if it is a necessity ii. The quantity demanded of an asset is positively related to its expected return relative to alternative assets iii. The quantity demanded of an asset is negatively related to the risk of its returns relative to
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/21/2011 for the course FIN 3403 taught by Professor Duong during the Spring '08 term at The University of Oklahoma.

Page1 / 2

Charlee_CH_4 - FIN MKTS: Chapter 4 Why do Interest Rates...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online