Question 1

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of savings deposits increase from $10,000 to $12,000. Your wealth elasticity of demand for savings deposits then is

Accepted Answer

The wealth elasticity of demand is calculated as the percentage change in the quantity demanded divided by the percentage change in wealth. Here, the quantity demanded of savings deposits increases from $10,000 to $12,000, a 20% increase. Wealth increases from $100,000 to $200,000, a 100% increase. Thus, the elasticity is 20%/100% = 0.2, which is less than 1. This indicates that savings deposits are a necessity asset, as the proportionate increase in demand is less than the proportionate increase in wealth.

Question 2

Comparing U.S. household portfolios in 2006 with U.S. household portfolios in 1950, which of the following statements is true?

Accepted Answer

According to the passage, pension reserves were a larger fraction of U.S. household portfolios in 2006 compared to 1950, but U.S. government securities were a smaller fraction. None of the other answer choices accurately reflect the changes in household portfolios between 1950 and 2006 that were discussed in the passage.

Question 3

Which of the following was NOT a major store of U.S. household wealth in 1950?

Accepted Answer

Mutual funds were not a major store of U.S. household wealth in 1950. At that time, the mutual fund industry was much smaller and less developed than it is today, making it a less common investment vehicle for the average household.

Question 4

An asset in a portfolio always represents

Accepted Answer

An asset in a portfolio always represents a store of value, meaning it holds value over time and can be used as a means of saving or investing. A medium of exchange (A) is something used to facilitate transactions, like currency, while a unit of account (B) is a standard measure used to compare value. A liability (D) is something owed by an individual or entity, the opposite of an asset.

Question 5

A portfolio is a

Accepted Answer

A portfolio is a collection of assets such as stocks, bonds, and other investments held by an individual or an institution. The purpose of creating a portfolio is to diversify risk and maximize returns by investing in a variety of assets.

Question 6

Luxury assets are assets

Accepted Answer

Luxury assets are often held by savers for investment purposes, as they can appreciate in value over time. Examples include art, fine wine, and collectible cars. These assets are not primarily used for regular transactions or exempt from federal income tax, and their wealth elasticity typically exceeds 1, indicating demand increases more than proportionally as wealth increases.

Question 7

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 2006?

Accepted Answer

In 2006, pension reserves constituted the largest fraction of U.S. household portfolios, as they include retirement savings and are a significant component of household wealth.

Question 8

Suppose that when your wealth increases from $100,000 to $200,000 , your holdings of U.S. Treasury securities increases from $2000 to $5000. Your wealth elasticity of demand for U.S. government securities then is

Accepted Answer

The answer of Suppose that when your wealth increases from...

Question 9

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 1950?

Accepted Answer

In 1950, equities made up the largest fraction of the portfolios of U.S. households, reflecting the post-World War II economic boom and the growth of the stock market during this period.

Question 10

Which of the following is NOT a determinant of asset demand?

Accepted Answer

The saver's income is not a determinant of asset demand. Wealth, expectations of the return on the asset, and the liquidity of the asset all affect the demand for assets.

Question 11

As wealth decreases, which of the following is likely to account for a larger fraction of a saver's portfolio?

Accepted Answer

As wealth decreases, savers tend to prioritize liquidity and safety, making checking account balances a larger fraction of their portfolio.

Question 12

Necessity assets are assets

Accepted Answer

Necessity assets are used by savers to conduct regular transactions, such as daily expenses or bills, rather than for investment or saving purposes.

Question 13

The theory of portfolio allocation describes

Accepted Answer

The theory of portfolio allocation explains how individuals and investors choose to allocate their wealth among different assets based on their return expectations, risk tolerance, and other factors. It helps to understand their behaviors in selecting one asset rather than another.

Question 14

Economists believe that as a saver's wealth increases, the saver will generally

Accepted Answer

As a saver's wealth increases, they are more likely to increase the fraction of wealth held as common stock. This is because with more wealth, savers are often willing to take on more risk for the potential of higher returns, and stocks generally offer higher returns compared to other assets like cash or bonds, albeit with higher risk.

Question 15

As wealth increases, which of the following is likely to account for a smaller fraction of a saver's portfolio?

Accepted Answer

As wealth increases, savers are more likely to allocate a smaller fraction of their portfolio to holding cash because they have a greater capacity to take on risk and invest in securities with higher potential returns. Therefore, the correct choice is C, cash.

Question 16

Necessity assets are assets

Accepted Answer

Necessity assets are goods or services that people must have regardless of their income levels, such as food, housing, and healthcare. Wealth elasticity is a measure of the responsiveness of demand for a good or service to changes in income levels. Since necessity assets have a wealth elasticity of less than 1, it means that the proportion of income spent on these assets decreases as income levels increase, indicating that they are essential goods for which demand remains relatively constant regardless of changes in income levels.

Question 17

The theory of portfolio allocation

Accepted Answer

The theory of portfolio allocation predicts how savers allocate their assets among different types of investments based on their risk preferences and expected returns. It takes into account factors such as diversification and asset correlation to minimize risk and maximize returns.

Question 18

Luxury assets

Accepted Answer

Luxury assets generally have high transactions costs of acquisition, meaning the cost to purchase and/or transfer ownership of these assets are generally high. This is due to factors such as rarity, exclusivity, and specialized expertise required to properly evaluate and authenticate these assets. Option A is incorrect since luxury assets can have wealth elasticities greater than 1. Option B is incorrect since luxury assets often have high fixed costs of ownership, such as maintenance, insurance, and storage. Option D is incorrect since the tax rate on returns for luxury assets can vary based on asset type and other factors.

Question 19

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of stock mutual funds increases from $20,000 to $50,000. Your wealth elasticity of demand for stock mutual funds then is

Accepted Answer

The wealth elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in wealth. In this case, the percentage change in quantity demanded of stock mutual funds is (50,000-20,000)/20,000 = 150%, and the percentage change in wealth is (200,000-100,000)/100,000 = 100%. Therefore, the wealth elasticity of demand is 150%/100% = 1.5, which is greater than 1. When the elasticity is greater than 1, the good is considered a luxury asset, meaning that as wealth increases, the percentage increase in quantity demanded is greater than the percentage increase in wealth.

Question 20

The wealth elasticity of demand describes the percentage change in

Accepted Answer

The wealth elasticity of demand is a measure of the responsiveness of demand for a particular good or asset to changes in the wealth of consumers. It calculates the percentage change in the quantity demanded of an asset for a given percentage change in the wealth of the buyer. Therefore, the correct choice is C, as it describes the quantity of an asset demanded for a given percentage change in wealth.

Quiz 5: The Theory of Portfolio Allocation

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of savings deposits increase from $10,000 to $12,000. Your wealth elasticity of demand for savings deposits then is

Comparing U.S. household portfolios in 2006 with U.S. household portfolios in 1950, which of the following statements is true?

Which of the following was NOT a major store of U.S. household wealth in 1950?

An asset in a portfolio always represents

A portfolio is a

Luxury assets are assets

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 2006?

Suppose that when your wealth increases from $100,000 to $200,000 , your holdings of U.S. Treasury securities increases from $2000 to $5000. Your wealth elasticity of demand for U.S. government securities then is

Which of the following assets made up the largest fraction of the portfolios of U.S. households in 1950?

Which of the following is NOT a determinant of asset demand?

As wealth decreases, which of the following is likely to account for a larger fraction of a saver's portfolio?

Necessity assets are assets

The theory of portfolio allocation describes

Economists believe that as a saver's wealth increases, the saver will generally

As wealth increases, which of the following is likely to account for a smaller fraction of a saver's portfolio?

Necessity assets are assets

The theory of portfolio allocation

Luxury assets

Suppose that when your wealth increases from $100,000 to $200,000, your holdings of stock mutual funds increases from $20,000 to $50,000. Your wealth elasticity of demand for stock mutual funds then is

The wealth elasticity of demand describes the percentage change in