FINE 4050 Chapter Notes - Chapter 9: Compound Annual Growth Rate, Investment Fund, Random Variable
12 Dec 2015
School
Department
Course
Professor
Document Summary
Optimal discretionary consumption: choose a consumption pattern that maximizes total standard of living over lifetime; influenced by the rate of return on savings; higher the rate of return, more consumption once can have. Valuation rate (v): have assumed before this point that same valuation rate is used in all contexts and is set arbitrarily; in reality, valuation rates fluctuate in various scenarios according to uncertainty. Valuation rate of wages (vw): incorporates riskiness of human capital; safe jobs discount wages at lower rates; those in riskier jobs discount expected wages at higher rates. Valuation rate of discretionary consumption (vc): related to investment rate of return on portfolio; rate used should be equal to the rate of return realized on chosen investment. Asset class: group of assets that have similar risk/return characteristics; assets that behave similarly in response to changes in economic factors.
