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.
Question 2
All of the following statements are true of the minimum efficient scale except one. Which one?
A) Any increase in the scale of operation will encounter either constant returns to scale or diseconomies of scale.
B) All possible economies of scale have been exhausted.
C) The short-run average total cost curve's minimum point is equal to the long-run average cost curve's minimum point.
D) An increase in the output level will increase profit.
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Financial Management: Core Concepts
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