The Rational Investor

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Questions and Answers

According to Merton Miller and Franco Modigliani, rational investors always prefer more wealth to less and are indifferent as to whether a given increment to their wealth takes the form of cash payments or an increase in the market value of their holdings of shares.

  • Rational investors are immune to cognitive and emotional errors.
  • Rational investors prefer cash payments over an increase in the market value of their holdings of shares. (correct)
  • Rational investors are not concerned about their wealth.
  • Rational investors are more likely to buy Patek Philippe watches.

How do financial economists use the term 'rational' when describing investors?

  • As a synonym for 'normal-foolish'
  • As a synonym for 'normal-smart' (correct)
  • As a term to describe investors who prefer cash payments over an increase in the market value of their shares
  • As a synonym for 'immunity to cognitive and emotional errors'

What is a starting point for a description of the rational investors of standard finance?

  • Always buying Patek Philippe watches
  • Preferring Timex watches over Patek Philippe watches
  • Being immune to all cognitive and emotional errors (correct)
  • Preferring cash payments over an increase in the market value of their shares

How do people commonly use the term 'rational' in relation to investors?

<p>As a synonym for 'normal-smart' (C)</p> Signup and view all the answers

How do financial economists define 'rational' investors?

<p>Investors who always prefer more wealth to less and are indifferent to the form of wealth increase (A)</p> Signup and view all the answers

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