Wilbur Rickhiser, a Financial Advisor, Recently Told One of His

question 97

Multiple Choice

Wilbur Rickhiser, a financial advisor, recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss.Let's say you bought a stock for $50 per share but that six months later the price fell to $40 after a poor earnings report.Many of my clients in this situation will hold the stock, hoping the price will later rise above $50.In most cases like this the price does not rise and may even fall.You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice?

• A)People sometimes buy stocks because other people are buying them or they want to appear to be fashionable.
• B)People sometimes make mistakes when they buy stocks because of the endowment effect.
• C)People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices.
• D)People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at $50 per share is a sunk cost.

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Definitions:

Accrued Interest

Interest that has accumulated over a period of time but has not yet been paid or charged.

Semiannual Interest

Interest that is paid or calculated twice a year on a loan or investment.

Available-for-sale Securities

Available-for-sale securities are financial assets that are neither classified as held-to-maturity securities nor trading securities, and are recorded at fair market value on the balance sheet.

Fair Value

The estimated market value of an asset or liability, reflecting the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction.