Suppose the benefit of owning a painting, in terms of your personal enjoyment, is worth 5% of the value of the painting. If the expected rate of return on stocks is 7%, then the painting should grow in value by _________ per year.
A) 5%
B) 12%
C) 7%
D) 2%

Question

Quizplus · Accepted Answer

Since the benefit of owning the painting is worth 5% of its value, the total expected return from owning the painting is 7% (the expected return from stocks) + 5% (the personal enjoyment value). Therefore, the painting should grow in value by 2% per year (7% + 5% = 12%, but we only care about the portion due to market appreciation, which is 7%). Therefore, the correct choice is D) 2%.

Suppose the Benefit of Owning a Painting, in Terms of Your