Académique Documents
Professionnel Documents
Culture Documents
4. Discuss why you would expect the saving-borrowing pattern to differ by occupation (for
example, for a doctor versus a plumber).
Naturally, individuals are pursuing to maintain a constant level of consumption
depending on their needs. One factor affecting their consumption decisions is their occupation
subject to income earned. The pattern of how they borrow and save over their lifetime varies
inversely. People usually borrow when they have high needs and/or low incomesand save when
they have low needs and/or high incomes.
For instance, a doctor and a plumber in terms of occupation.Because of their different
incomes, their consumption differs. A doctor receives an income higher than a plumber, given
that both occupations are paid per service and dependence of the available clients.Practically, a
one-service payment to a doctor typically matches the compounded payments to a plumber.
Savings for high-yielding occupations is greater than those after. Mostly a doctor tends to save
more proportion of his income either by securing it in a financial institutionin the fear of
inflation, unemployment and /or illness and for the desire of bequest, or by investing it in terms
of durable goods such as car, house and appliances than the plumber who generally prefers to
hold cash for everyday transactions and whose income is more closely to his consumption level.
Likewise, being a plumber is considered as a self-employment work which doesnt warrant any
social security entitlements, yet still decreasing savings in his part, as compared to the doctors
job. However,when consumption exceeds income, borrowings inclines. In respect to their future
income expectations, the former commonly opt to have higher borrowings than the plumber if he
anticipate that his income will increase in the future, thus enabling him to repay these loans.
5. The Wall Street Journal reported that the yield on common stocks is about 2
percent,whereas a study at the University of Chicago contends that the annual rate of
return oncommon stocks since 1926 has averaged about 10 percent. Reconcile these
statements.
The analysis and estimation of the required rate of return are complicated by the behavior
of market rates over time. Even though all stocks have recognized returns, annual yields during
any year can usually differ substantially; hence, differences in yields result from the riskiness of
each investment.
6. Some financial theorists consider the variance of the distribution of expected rates of
return to be a good measure of uncertainty. Discuss the reasoning behind this measure
ofrisk and its purpose.
Most people are risk averse, in that they wish to minimize the amount of risk they must
endure to earn a certain level of expected return. If investors were indifferent to risk, they would
not be influenced by the differences among various stocks, whereas the risk-averse investor
would clearly prefer less risky. Therefore, most people want to know the range, or dispersion, of
possible outcomes, as well as the likelihood of certain outcomes occurring.