Wilbur Rickhiser, a financial advisor, recently told one of his clients: "The biggest mistake you can make is to hold onto a stock for too long in order to avoid a loss
Let's say you bought a stock for $50 per share but that six months later the price fell to $40 after a poor earnings report. Many of my clients in this situation will hold the stock, hoping the price will later rise above $50. In most cases like this the price does not rise and may even fall. You must know when to cut your losses." Which of the following is the best explanation for Rickhiser's advice?
A) People sometimes make mistakes when they buy stocks or when they buy goods and services: they ignore the monetary opportunity costs of their choices.
B) People sometimes buy stocks because other people are buying them or they want to appear to be fashionable.
C) People sometimes make mistakes when they buy stocks because of the endowment effect.
D) People often fail to ignore the sunk costs of their decisions. The cost of the stock bought at $50 per share is a sunk cost.
D
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Shawn determines that if Lexall Corporation has high revenues, then Waters Corporation will have low revenues, and that if Lexall Corporation has low revenues, then Waters Corporation will have high revenues. Shawn buys stock in both corporations
a. He has reduced firm-specific risk but not market risk. b. He has reduced market risk, but not firm-specific risk. c. He had reduce both firm-specific risk and market risk. d. He has reduced neither firm-specific risk nor market risk.
Juan works at Texas Burgers in El Paso and earns $8.00 per hour. His twin brother Felipe works in Mexico Burgers in Ciudad Juarez just across the border and earns $3.00 per hour for exactly the same work. An economist looking at this situation sees:
A. an incentive for Felipe to quit and find another job in Mexico. B. an incentive for Felipe to cross the border to get a job and thus reduce the gap. C. evidence that the law of one price has no support in the real world. D. the tendency of the rich to get richer and the poor to get poorer, widening the gap.