Question

1. Suppose a foundation invested 1000 dollars in the stock market in 1870. Accounting for inflation, what would have been the dollar value of this investment in September 2019?

A. 2850 dollars. B. 7660 dollars. C. 19,500 dollars. D. 19,500,000 dollars.

2. Which of the following is an arbitrage opportunity?

A. Two stocks, one has expected return of 5%, the other 4%. B. The bank offers you a loan at 5% interest and a savings account that pays 4% interest. C. The bank offers you a loan at 4% interest and a savings account that pays 5% interest. D. For every $1 you deposit today, the bank offers to pay you $1 in a year if the economy is bad and $2 in a year if the economy is good.

3. Which of the following offers would a risk-averse investor find most valuable?

A. A coin toss that pays $1.50 on heads and $-0.50 on tails. B. A financial instrument that pays $0.75 if the investor still has a job tomorrow and $1.25 if the investor is unemployed. There is a 50% chance that the investor loses their job tomorrow. C. A coin toss that pays $2 on heads and $-2 on tails. D. A coin toss that pays $1 on heads and $-1 on tails.

4. Which of the following is not a real asset?

A. Human capital accumulated taking courses at NYU Stern. B. NYU classes website. C. A dollar bill. D. A gold coin.

Answer 1

1]

The average nominal return over this period has been around 6.85%, as per online sources

Value today = value in 1870 * (1 + 6.85%)^{number of years}

Value today = $1,000 * 1.0685¹⁴⁹ = ~ $19,500,000

2]

An arbitrage opportunity is a risk-free profit

C is the correct option. It is an arbitrage opportunity because an amount can be borrowed from the bank at 4%, and the same amount invested in the bank at 5%. There is virtually no risk, and a profit can be earned

3]

A risk-averse investor avoids risk. Therefore, options A, C and D would be avoided by a risk-averse investor. The risk-averse investor would find option B most valuable since there is no risk of loss in either outcome

4]

An asset is something of value. It can be exchanged for something of value.

Gold and dollar bills are assets. Human capital is an asset because it can be put to use to earn monetary returns.

A classes website is not an asset