Economics (McConnell), AP* Edition, 20th EditionChapter 35:
Financial Economics After studying this chapter, you should be able to: LO 35.1 | Define financial economics and distinguish between economic investment and financial investment. | LO 35.2 | Explain the time value of money and how compound interest can be used to calculate the present value of any future amount of money. | LO 35.3 | Identify and distinguish between the most common financial investments: stocks, bonds, and mutual funds. | LO 35.4 | Relate how percentage rates of return provide a common framework for comparing assets and explain why asset prices and rates of return are inversely related. | LO 35.5 | Define and utilize the concept of arbitrage. | LO 35.6 | Describe how the word risk is used in financial economics and explain the difference between diversifiable and nondiversifiable risk. | LO 35.7 | Convey why investment decisions are determined primarily by investment returns and nondiversifiable risk and how investment returns compensate for being patient and for bearing nondiversifiable risk. | LO 35.8 | Explain how the Security Market Line illustrates the compensation that investors receive for time preference and nondiversifiable risk and why arbitrage will tend to move all assets onto the Security Market Line. |
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