What is absolute risk aversion?
measures the degree to which an individual dislikes risk at a given level of wealth.
What is marginal utility of wealth?
The additional satisfaction (utility) an individual gains from one extra unit of wealth.
What is relative risk aversion?
measures an individual’s dislike of risk relative to their level of wealth, that is, how risk tolerance changes in proportional (percentage) terms as wealth changes.
What is ranking?
Ranking means that an individual’s preferences are complete and transitive, so all alternatives can be ordered consistently.
What is measurability?
Measurability means that preferences can be represented by a numerical utility function, where differences in utility have meaning.
What is strong independence?
If you prefer option A to option B, then you should still prefer A to B even after both options are combined with the same extra outcome.
Which bonds do lower-income tax bracket investor want?
Will prefer taxable bonds
Typically:
Corporate bonds
High-yield bonds
Reason:
Pays little tax anyway
Benefits more from higher pre-tax yields
Which bonds do high-income tax bracket investors want?
Will prefer tax-advantaged bonds
Typically:
Municipal bonds (tax-exempt interest, in countries where applicable)
Other tax-exempt or tax-deferred bonds
Reason:
avoids paying high taxes on interest income
Lower pre-tax yield is acceptable because after-tax return is higher
How is the price of a share of a company that pays no dividend or very infrequent dividend
determined?
The price of a share that pays no or infrequent dividends is determined as the present value of expected future cash flows to shareholders, such as future dividends or the expected resale price, discounted at the firm’s cost of equity.
