The Nominal Interest Rate in an Economy Is 5 Percent

question 36

Multiple Choice

The nominal interest rate in an economy is 5 percent, and there is also a 15 percent probability of having cash lost or stolen in the economy.Given this information, what is the cost of going to the ATM for an individual who spends $10 daily and has a total cost of holding cash = (365/T) + T.Assume that the individual visits the ATM once in every T days.

• A)$1
• B)$2
• C)$3
• D)$4

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Definitions:

Indexed Mutual Fund

A mutual fund designed to replicate and manage a portfolio to match the performance of a market index.

Economic Downturn

A period of reduced economic activity characterized by declines in spending and investment, often leading to recession.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio to reduce exposure to any single asset or risk.

Diversifiable Risk

A type of risk that can be reduced or eliminated from a portfolio through investments in a variety of assets, also known as unsystematic risk.