Figures for Chapter 1 Basic Concepts in Finance

Figures for Chapter 1 Basic Concepts in Finance (Quantitative Financial Economics) © K. Cuthbertson and D. Nitzsche

Figure 1 : NPV and the Discount Rate NPV 0 5 10 15 © K. Cuthbertson and D. Nitzsche Cost of Funds, r(%)

Figure 2 : Utility Functions Utility U(W) Risk Neutral Risk Averter U(16) U(10) U(4) Risk Lover 4 10 16 © K. Cuthbertson and D. Nitzsche Wealth

Figure 3 : Monetary Risk Premium Utility U(16) = 4 U(EW) = 101/2 =3. 162 U(W)= W 1/2 p E[U(W)] = 3 =0. 5(4)+0. 5(2) A U(4) = 2 0 4 EW=10 (W–p) = 9 © K. Cuthbertson and D. Nitzsche 16 Wealth

Figure 4 : Risk-Return : Indifference Curves ERp I 2 I 1 C’’’ A A’’ C (A-A’’) = (C-C’’) sp 2 © K. Cuthbertson and D. Nitzsche

Figure 5 : Intertemporal Consumption : Indifference Curves C 1 B A y 1 F G I 1 x 0 y 0 E D x 0 H I 0 C 0 © K. Cuthbertson and D. Nitzsche

Figure 6 : Production Possibility Curve Consumption in period - one 10 th investment project B B’’ 2 nd investment project A’’ C 1(1) A 1 st investment project I 0 Note : (A - A’’ = B – B’’). © K. Cuthbertson and D. Nitzsche C 0(1) W 0 Consumption in period-zero

Figure 7 : Money Market Line Consumption in period - one X C 1 * Money Market Line : (slope = -(1+r) I 0 * C 0 * © K. Cuthbertson and D. Nitzsche W 0 Consumption in period-zero

Figure 8 : Consumer’s Maximisation Consumption in period - one C 1 ** Y I 2 I 1 C 0** © K. Cuthbertson and D. Nitzsche Consumption in period-zero

Figure 9 : Maximisation with Capital Market Consumption in period - one C 1** Y X C 1 * I 0 * L C 0** Money Market Line : (slope = -(1+r) C 0 * © K. Cuthbertson and D. Nitzsche W 0 Consumption in period-zero