Investments and Markets The Comparison Principle Example Your uncle offers you a special investment.If you give him $100 now,he will repay you $110 in one year.His repayment is fully guaranteed by a trust fund of U.S.Treasury securities,and hence there is virtually no risk to the investment.Also,there is no moral or personal obligation to make this investment.You can either accept the offer or not.What should you do? What if the prevailing interest rate is 7%,or 12%? You evaluate the investment by comparing it with other investments available in the financial market that provides a basis for comparison. Example If your uncle offers you a family portrait whose value is hugely sentimental, you must decide whether,to you,the portrait is worth his asking price. )Q0 Xi CHEN (chenxi01090bfsu.edu.cn) Investment Science 8/16Investments and Markets The Comparison Principle Example Your uncle offers you a special investment. If you give him $100 now, he will repay you $110 in one year. His repayment is fully guaranteed by a trust fund of U.S. Treasury securities, and hence there is virtually no risk to the investment. Also, there is no moral or personal obligation to make this investment. You can either accept the offer or not. What should you do? What if the prevailing interest rate is 7%, or 12%? You evaluate the investment by comparing it with other investments available in the financial market that provides a basis for comparison. Example If your uncle offers you a family portrait whose value is hugely sentimental, you must decide whether, to you, the portrait is worth his asking price. Xi CHEN (chenxi0109@bfsu.edu.cn) Investment Science 8 / 16