If Mr McLean Thinks the Last Dollar Spent on Bowling Yields

question 37

Multiple Choice

If Mr. McLean thinks the last dollar spent on bowling yields more satisfaction than the last dollar spent on hamburgers, and McLean is a utility-maximizing consumer, he should

• A) bowl less, so the marginal satisfaction from expenditures in this area will increase.
• B) spend more on hamburgers, so total satisfaction from that activity will increase.
• C) eliminate spending on hamburgers.
• D) bowl more and spend less on hamburgers.

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Definitions:

Efficient Frontier

A graph representing the set of portfolios that provides the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

Capital Market Line

A line that depicts the risk-reward profile of investable assets, showing the rate of return for varying levels of risk, based on the market risk premium and the risk-free rate.

Minimum-Variance Point

The point on a portfolio's efficient frontier at which the portfolio has the lowest level of volatility or risk for its level of expected return.

Zero Correlation

A statistical measure indicating that two variables do not move in tandem and their relationship is completely random.