The Notion of Consumption Smoothing Means

question 96

Multiple Choice

The notion of consumption smoothing means:

• A) people tend to spend about the same amount each month.
• B) people tend to spend about the same amount each year, and if more is spent this year than in the past, they would tend to spend less next year.
• C) consumption varies less than income over a person's lifetime.In early life people tend to borrow, in late life people tend to dissave, but in their middle years they tend to save.
• D) consumption patterns tend to correlate perfectly with income.People spend the exact amount of their income over their lifetime.
• E) consumption tends to vary more than income over a person's lifetime.Although people should smooth their consumption over the years, they don't.If consumption were smoothed, people would be better off.

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Definitions:

Beta

The assessment of a stock's price movements compared to the aggregate market.

Unsystematic Risk

The risk associated with individual assets, such as a company's stock, that can be mitigated through diversification.

Beta

A standard for evaluating the unpredictability, or fundamental risk, of a security or diversified portfolio in contrast with the entire market.

Non-diversifiable Risk

The portion of risk that can't be eliminated through diversification, often related to systemic factors affecting all investments.