Chapter 27

Chapter 27 focuses on finance and the decisions that influence a person's choice on investments and savings. When a person is deciding where to invest or save, that person must consider both the present value and future value that the asset will have, along with how often it is compounded. these three factors are crucial to determining if the investment is a good one. The process of finding  a present value of a future amount of money is known as discounting. When making investments, people tend to avoid taking risks, otherwise known as risk aversion. Utility, a person's subjective measure of well-being changes based on the amount of wealth a person has. However, as the person has more and more money, they receive less utility per dollar. This concept is known as diminishing marginal utility. The utility function on the graph gets flatter the more wealth the person has. It is the shape of the function that shows diminishing marginal utility in action. In order to reduce risk, one tactic a person can use is diversification. This goes by the theory that having multiple smaller and unrelated risks will pose as a less over all risk. In other words, "don't put all your eggs in one basket." Some risks only affect firms. These are known as firm specific risks. While market risks affect all the companies in a stock market. Efficient market hypothesis is the theory that asset prices show information about the value of the asset. Informal efficiency is the description of an assets price that show all available information.