Chapter 5

• Asset is anything that can be owned and has value.
• Wealth is the total resources owned by the individual including all assets.
• Expected Return is the return expected over the next period on one asset relative to alternative assets.
• Risk is the degree of uncertainty associated with the return on one asset relative to alternative assets.
• Liquidity is the ease and speed with which an asset can be turned into cash relative to alternative assets.
• Theory of Portfolio Choice is holding all other factors constant.
• There is a negative relationship between the price and the interest rate.
• This formula is for yield of maturity of a discounted bond:

  
• The formula of yield to maturity of a consol/perpetuity bond is:

  
• Expected inflation is an increase in the expected rate of inflations lowers the expected return for bonds, causing the demand curve to shift to the left.
• Two main categories of assets that people use to store their wealth: money and bonds
• Income effect is a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right.
• Price-Level Effect is a rise in the price level causes the demand for money at each interest rate to increase and the demand to shift to the right.