Suppose an Individual Has a Fixed Amount of Wealth to Allocate

question 3

Multiple Choice

Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (C₁ and C₂) .Any funds not spent in period 1 will earn interest (at the rate r) ,which will increase purchasing power in period 2.Consider four possible reactions to an increase in r: Which of these is consistent with the hypothesis that both C₁ and C₂ are normal goods?
I.C₁ increases.
II.C₁ decreases.
III.C₂ increases.
IV.C₂ decreases.

• A)I,II,III,and IV.
• B)I,II,and IV,but not III.
• C)I,III,and IV,but not II.
• D)II and III,but not I and IV.
• E)I,II and III,but not IV.

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Definitions:

Arbitrage

The practice of profiting from price differences of the same asset in different markets, exploiting inefficiencies without market risk by simultaneously buying and selling.

Expected Rate of Return

The mean amount of profit or loss one can expect from an investment, accounting for all possible outcomes.

Adjusted Beta

A measure that adjusts a security's beta (volatility relative to the market) based on its historical performance, to provide a more relevant estimation of its future volatility.

Unadjusted Beta

The beta of a stock calculated directly from historical data, without applying any adjustments for its specific characteristics.