Fully answer the following questions. 2 points per question unless otherwise noted. Contact me with any questions.
1. What is the present value of money? Give an example of how it is computed, showing your math.
2. What is the future value of money? Give an example of how it is computed, showing your math.
3. What is compounding interest? Why is it so important in investing over time? Give an example to support your answer. (3 points)
4. Recall the example of getting $100 now or $200 in 10 years. When would you want $100 now instead of $200 in 10 years? Use present value, future value, and interest rates in your answer. (3 points)
5. What is risk aversion? How does it relate to the utility function?
6. Explain the role of insurance and how it relates to risk. Give an example for car insurance.
7. Explain the concept of adverse selection with insurance. Give an example of how it works in health insurance.
8. Explain the concept of moral hazard with insurance. Give an example of how it works in health insurance.
9. Explain the concept of diversification and how it relates to risk. Give an example with stocks and the stock market.
10. Refer to Figure 3 on page 280. Explain the trade-off between risk and return. Give an example with stocks and the stock market.
11. Watch the stock picking and can you beat the market videos on D2L. Explain 3 reasons why, on average, you can’t “beat” the stock market. (3 points).
