The Miller-Orr model:

Question

Quizplus · Accepted Answer

The Miller-Orr model recommends investing an amount described as (U* - C*) in marketable securities when the cash balance reaches U*, where U* is the upper limit or the maximum cash balance desired and C* is the fixed transaction cost for buying and selling securities. This investment effectively moves excess cash into interest-bearing securities and helps to maintain the cash balance between the upper limit and the lower limit (L), reducing the need for constant monitoring and frequent transactions. Option A is incorrect, as the model recommends investing in securities rather than selling them. Option B is incorrect because the model only requires buying securities when the cash balance falls below the lower limit, not selling. Option C is incorrect because the model also considers fluctuations in cash flows and transaction costs, not just opportunity costs. Option D is incorrect because the target cash balance increases as order costs increase, not declines.

The Miller-Orr Model