In Deciding How Much Money to Hold, Individuals

question 23

Multiple Choice

In deciding how much money to hold, individuals

• A)must understand the velocity of the money and its role in the economy.
• B)compare the inflation rate with the market interest rate.
• C)base their decisions on the amount of spending they plan to undertake.
• D)evaluate the relative costs and benefits of holding money versus other assets.

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Definitions:

Reward-To-Risk Ratio

A measure used in finance to compare the expected returns of an investment to the amount of risk undertaken to capture these returns.

Risk-Free Rate

The theoretical rate of return of an investment with zero risk of financial loss, often represented by the yield of government bonds from stable governments.

Market Risk Premium

This is the extra return expected by investors for holding a risky market portfolio instead of risk-free assets.

Security Market Line

A line that represents the risk versus expected return of the market; used to assess the performance of investments compared to the market.