Question

As you know, any individual's view of opportunity cost is likely to be different from others'. Prices in the market - whether bonds or stocks - communicate something about what market participants overall see as opportunity cost. Or, in more market specific terms, required returns.

So say you see that Fake Company Zeta closed today at 18.82. You also know that the company just announced its most recent annual dividend of 2.05. Plus, the company has a history of increasing dividends about 2.2.

Because you should be accustomed to working with four decimals, enter your answer as a decimal and rounded to the nearest fourth decimal. Do not enter as a percent. Do not use percent signs, dollar signs, or commas.

For example, if you calculated 0.1147, you would enter 0.1147. If you are working with more than four decimals and calculated 0.09286, then enter 0.0929.

With the explanation and examples above, no credit is given for answers entered incorrectly. Answers are considered correct + or - 0.0050.

Answer 1

The question deals with how market prices reflect the collective opportunity cost of participants and demonstrate varying required returns based on the risk profile of financial products like stocks and bonds.

Step-by-step explanation:

The concept presented in the question pertains to the idea that market prices of financial securities like bonds and stocks reflect the collective assessment of opportunity cost by market participants. Opportunity cost in this context is the expected rate of return that investors require to compensate for the risk of delaying consumption and for facing potential inflation and borrower riskiness.

Over time, stocks have demonstrated higher average returns compared to bonds or savings accounts due to their higher risk levels. The value of stocks can fluctuate significantly, while bonds have more stable values affected mainly by interest rate changes. High-risk investments are expected to yield high returns to attract investors, signifying the relationship between risk and potential reward.

The opportunity cost for investors is also illustrated through the example of bonds. When interest rates rise after purchasing a bond with a lower rate, the investor experiences a loss relative to new bonds issued at the higher rate. This lost potential income represents the opportunity cost of holding a lower-yielding bond.