If Housing Prices Increase by 25% and the Price of All

question 17

Multiple Choice

If housing prices increase by 25% and the price of all other goods decreases by 22%,then:

• A) the consumer price index (CPI) would definitely fall during the year in question because housing prices do not constitute the majority of the CPI.
• B) the CPI would definitely rise during the year in questions because housing prices do constitute the majority of the CPI.
• C) the CPI would rise by about 1.5% because housing constitutes about half of the market basket in the CPI.
• D) because housing spending is considered investment, the producer price index (PPI) but not the CPI would be the only price index affected by the change.
• E) the CPI would only be affected in a small way because it includes about 8,000 goods and housing is only one of the 8,000.

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Definitions:

Market Portfolio

A theoretical bundle of investments that represents a segment of the overall market, typically used in the Capital Asset Pricing Model.

Sharpe Measure

A risk-adjusted performance metric that evaluates the return of an investment compared to its risk, with a higher Sharpe ratio indicating better risk-adjusted returns.

Beta

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole, with a value greater than 1 indicating higher risk and a value less than 1 indicating lower risk.

Treynor Measure

A metric for assessing the returns of an investment portfolio, adjusting for the risk taken as measured by beta.