Suppose You Own a Stock Portfolio Composed of Shares in Firms

question 18

Essay

Suppose you own a stock portfolio composed of shares in firms that are part of the financial services industry.You don't work - all you do is plan your consumption now and when you retire, and the only asset you have is your stock portfolio.In this problem, model your decisions in a graph with "consumption now" on the horizontal axis and "consumption at retirement" on the vertical.Throughout, assume that the long run rate of return of investment is r over the period from now to retirement.
a.Graph your initial budget constraint - and indicate where in your graph your endowment point lies as well as what the slope of the budget constraint is.
b.This morning, you woke up to find that the current financial crisis has wiped out some of the firms in your stock portfolio.As a result, your portfolio is only worth half of what it was yesterday.Assuming that the long run rate of return r remains unchanged, what has just happened to your budget constraint?
c.Assuming that consumption now and in the future is always a normal good, will you cut down on your consumption plans now?
d.Now suppose I offer you a deal: I will give you enough cash to raise your current (financial) wealth back to what it was yesterday, but in exchange you agree to give me half of any return in your investments when you retire.You carefully analyze the deal and calculate that, under this deal, you could in fact just afford to consume the same bundle (but not strictly more) as you would without the deal.Will you accept the deal?
e.Does your answer to (d) depend on our assumption that consumption is always a normal good?
f.Can you tell whether, if you accept the deal, you will consume more than you otherwise would have? What does your answer depend on?
g.Can you tell whether, if you accept the deal, you consume more now than you had planned yesterday before the financial crisis wiped out half your wealth? What does your answer depend on?

Comprehend the impact of the Sun and Moon's positions on tidal phenomena.

Grasp the principles governing wave propagation and wave base depth.

Identify factors influencing shoreline erosion and sediment movement.

Recognize the role of seafloor features and ocean currents in shaping coastal changes.

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Definitions:

Limited LLC Member

An investor in a Limited Liability Company (LLC) who does not participate in its daily management and whose liability is restricted to the amount of their investment.

LLC Member

An individual or entity that owns a portion of a Limited Liability Company (LLC) and enjoys protection from personal liability for the company's debts and obligations.

Limited Partners

Investors in a partnership who are not involved in daily business operations and whose liability is limited to the amount of their investment.

Limited Liability

A legal principle that limits the financial liability of company owners to the amount they've invested in the business, protecting personal assets from company debts and obligations.