Suppose the benefit of owning a painting, in terms of your personal enjoyment, is worth 5 percent of the value of the painting. If the expected rate of return on stocks is 7 percent, then the painting should grow in value by _________ per year.
A) 5 percent
B) 12 percent
C) 7 percent
D) 2 percent

Question

Quizplus · Accepted Answer

The benefit of owning the painting in terms of personal enjoyment is unrelated to its financial value. Therefore, we should not factor it in when calculating the expected rate of return. Instead, we only consider the financial return, which is the growth in value of the painting.

If the expected rate of return on stocks is 7 percent, then the painting should grow in value by a similar amount. Therefore, the answer is D) 2 percent.

Suppose the Benefit of Owning a Painting, in Terms of Your