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

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

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

© K. Cuthbertson and D. Nitzsche Wealth Utility 0 A E[U(W)] = 3 =0.5(4)+0.5(2) (W–  ) = 9 EW=  U(4) = 2 U(W)= W 1/2 U(EW) = 10 1/2 =3.162 U(16) = 4 Figure 3 : Monetary Risk Premium

© K. Cuthbertson and D. Nitzsche p2p2 ER p I2I2 I1I1 A A’’ A’’’ C’’’ C’’ C (A-A’’) = (C-C’’) Figure 4 : Risk-Return : Indifference Curves

© K. Cuthbertson and D. Nitzsche C1C1 I1I1 C0C0 I0I0 H D E F AB G y1y1 x0x0 x0x0 y0y0 Figure 5 : Intertemporal Consumption : Indifference Curves

© K. Cuthbertson and D. Nitzsche Consumption in period-zero Consumption in period - one Note : (A - A’’ = B – B’’). C 1 (1) C 0 (1) W0W0 I0I0 A’’A 1 st investment project 2 nd investment project B’’ B 10 th investment project Figure 6 : Production Possibility Curve

© K. Cuthbertson and D. Nitzsche Consumption in period-zero Consumption in period - one C1*C1* C0*C0* W0W0 X Money Market Line : (slope = -(1+r) I0*I0* Figure 7 : Money Market Line

© K. Cuthbertson and D. Nitzsche I2I2 I1I1 Consumption in period-zero Consumption in period - one C 0 ** C 1 ** Y Figure 8 : Consumer’s Maximisation

© K. Cuthbertson and D. Nitzsche Consumption in period - one C1*C1* C0*C0* W0W0 X Money Market Line : (slope = -(1+r) I0*I0* C 1 ** Y Consumption in period-zero L C 0 ** Figure 9 : Maximisation with Capital Market