IN TERMS OF FORMULAS

+•

Zl< m >

:= 0 ,

'(1+i') (l+i')(l+i") (1+i) (1 +i")..(l + ’

(1 + i')

= 0 ,

(1 + i') (1 +i") .... (1

= 0 .

(1 + 0 (1 + i") .... (1 + iC"—1>)

These are n equations expressing Market Principle B.

§6. Investment Opportunity Principle A. (n Equations)

The equations in the four sets just reviewed differfrom the equations of Chapter XII only in the first set,which contain y’s in place of c’s. The c’s were supposedto be given or known, but the y’s are new unknownquantities. Consequently, the number of unknowns isgreater than the number in the first approximation,whereas the number of equations thus far expressed isthe same.

The additional equations needed are supplied by thetwo Investment Opportunity Principles, namely, Invest-ment Opportunity Principle A, that the range of choiceis a specified list of optional income streams, and Invest-ment Opportunity Principle B, that the choice among theoptional income streams shall fall upon that one whichpossesses the maximum present value.

The range of choice, i.e., the complete list of optionalincome streams, will include many which are ineligible—those which would not be selected whatever might be therate of interest—whether that rate be zero or one millionper cent. Excluding all ineligibles the remaining optionsconstitute the effective range of choice which in ChapterXI is pictured as the Opportunity line.

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