Chapter 5, Problem 1Q

To determine

Impact on Microsoft stock due to various situation.

Concept Introduction:

Wealth:

With increase in wealth, we have more resources available with which to purchase assets. Holding everything else constant, an increase in wealth raises the quantity demanded of an asset.

Expected Return:

Expected return is the return expected over the next period. An increase in an asset’s expected return relative to that of an alternative asset, holding everything else unchanged, raises the quantity of the asset.

Risk:

It is the degree of uncertainty associated with the return on one asset relative to alternative assets. A risk averse person prefers stock which have guaranteed expected return. A risk lover invests in assets where expected return is high but not guaranteed. Holding everything else constant, if an asset’s risk rises relative to that of alternative assets, its quantity demanded will fall.

Liquidity:

It is the ease at which an asset can be converted into cash.

The more liquid an asset relative to alternative assets, holding everything constant, the more desirable it is and the greater the quantity demanded will be.