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Ch11 - Chapter Eleven Asset Markets Assets An asset is a...

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Chapter Eleven Asset Markets

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Assets An asset is a commodity that provides a flow of services over time. E.g. a house, or a computer. A financial asset provides a flow of money over time -- a security.
Assets Typically asset values are uncertain. Incorporating uncertainty is difficult at this stage so we will instead study assets assuming that we can see the future with perfect certainty.

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Selling An Asset Q: When should an asset be sold? When its value is at a maximum? No. Why not?
Selling An Asset Suppose the value of an asset changes with time according to V t t t ( ) = - + - 1000 1000 10 2

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Selling An Asset 0 10 20 30 40 50 60 -1000 4000 9000 14000 19000 24000 Value Years
Selling An Asset V t t t ( ) = - + - 1000 1000 10 2 Maximum value occurs when V t t '( ) = - = 1000 20 0 That is, when t = 50.

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Selling An Asset 0 10 20 30 40 50 60 -1000 4000 9000 14000 19000 24000 Value Years Max. value of \$24,000 is reached at year 50.
Selling An Asset The rate-of-return in year t is the income earned by the asset in year t as a fraction of its value in year t. E.g. if an asset valued at \$1,000 earns \$100 then its rate-of-return is 10%.

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Selling An Asset Q: Suppose the interest rate is 10%.
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