Question

Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow. Briefly explain the concept of risk.

Answer 1

The dollar tomorrow is more valuable than day after tomorrow:
1. Inflation increases with time and hence real value of dollar keeps on decreasing.
2. The interest rates are always greater than 0 so due to discounting the value of dollars keeps on decreasing due to time value of money.

Concept of Risk:
Risk is the variance of the returns in stocks or standard deviation of fluctuations in dollar . Both systematic and unsystematic risks are there in portfolio. Systematic Risks are economic risks spread across all companies whereas unsystematic risk can be diversified.

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