1. What basic principle of finance can be applied to the valuation of any investment asset? 2. Identify the cash flows available to an investor in stock. How reliably can these cash flows be...

1. What basic principle of finance can be applied to the valuation of any investment asset?

2. Identify the cash flows available to an investor in stock. How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to estimating bond cash flows. Which security would you predict to be more volatile?

3. Some economists think that the central banks should try to prick bubbles in the stock market before they get out of hand and cause later damage when they burst. How can monetary policy be used to prick a bubble? Explain how it can do this using the Gordon growth model.

4. Forecasters predictions of inflation are notoriously inaccurate, so their expectations of inflation cannot be rational. Is this statement true, false, or uncertain? Explain your answer.

5. Whenever it is snowing when Joe Commuter gets up in the morning, he misjudges how long it will take him to drive to work. Otherwise, his expectations of the driving time are perfectly accurate. Considering that it snows only once every ten years where Joe lives, Joe s expectations are almost always perfectly accurate. Are Joe s expectations rational? Why or why not?