2. Answer all parts (a) - (d) of this question Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below (a) (b) 100 90 80 70 60 50 40 30 20 10 0 60 90 Stock Price 95 70 October November December January 50 Feburary 80 March Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? | Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? (c) In January, which month should Person B rather use as reference point in order to maximize their value? (d) Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum price that the stock will need to have in April to fulfill C's expectations?
2. Answer all parts (a) - (d) of this question Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below (a) (b) 100 90 80 70 60 50 40 30 20 10 0 60 90 Stock Price 95 70 October November December January 50 Feburary 80 March Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? | Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? (c) In January, which month should Person B rather use as reference point in order to maximize their value? (d) Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum price that the stock will need to have in April to fulfill C's expectations?
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter17: Financial Markets
Section: Chapter Questions
Problem 34CTQ: You and your friend have opened an account on E-Trade and have each decided to select five similar...
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