Miguel Is a 20 Year Old College Student Who Works

question 314

Multiple Choice

Miguel is a 20 year old college student who works part-time and earns an annual income of $12,000. To smooth out his life cycle changes in income, Miguel can

• A)save his earnings to use when he is middle-aged.
• B)lend money to a friend to purchase a new car.
• C)borrow money to pay for college, which he will later repay when his income rises.
• D)attempt to pay for college from his current earnings.

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Definitions:

Fama and French

Two renowned economists who developed the three-factor model explaining stock returns on the basis of market risk, size, and value.

Dividend-Discount Model

A method for determining the value of a stock by using predicted dividends and discounting them back to present value.

Mehra and Prescott

Two economists known for their work in the economics field, particularly for the Equity Premium Puzzle which questions why stocks have historically outperformed safer assets by such a wide margin.

Average Excess Returns

The average return on an investment above the benchmark or risk-free rate.