Quiz 12: Investing in Stocks and Bonds
The combinations selected are as follows: • Large-cap versus mid-cap • Cyclical versus defensive The stocks selected to represent each of the categories are as follows: Organize the information in a table: Calculate the yield to maturity can be calculated by using the following formula: Here, Following is the calculations for the approximate yield for each stock: Working notes: Calculate the approximate yield of B: Therefore, approximate yield of B is . Calculate the approximate yield of I: Therefore, approximate yield of I is . Calculate the approximate yield of E: Therefore, approximate yield of E is . Calculate the approximate yield of K: Therefore, approximate yield of K is . The yield of the mid-cap stock was the highest compared with the rest of the stocks. The cyclical stock is doing the worst. This is to be expected since cyclical stocks are sensitive to economic conditions, and the data was collected at a time when economic conditions were not at their best. The defensive stock was not doing much better than the cyclical stock. Based on these findings, the type of stock you own does make a difference in the approximate yield. The types most suitable to your investment purposes would depend on your tolerance for risk. Although the mid-cap stock has a high approximate yield, it is riskier than the large-cap stock. The large-cap stock, however, costs over $200,000 for one share of this particular stock.
There are various types of risk to which investors are exposed. Those are as follows: • Business risk: The degree of uncertainty associated with a firm's cash flows and with its subsequent capability to meet its expenses related to operating, on time. Companies may experience wide fluctuation in sales and can experience substantial losses now then due to business risk. • Financial risk: Risk associated with the total of debt utilized to finance the firm and its ability to meet these obligations on time. Companies that have little or no long term debt are fairly low in financial risk and vice versa. • Market Risk: Risk associated with the price volatility of a security. Price changes can be occurred from political, economic social conditions changes as well as due to tastes preferences of investor. More the price volatility greater the market risk vice versa. • Inflation risk (Purchasing power risk): Risk resulting from possible changes in price levels that can significantly affect investment returns. In timings of rising prices, the purchasing power of dollar declines that means with a given dollar, quantity of goods services purchase will get reduced. • Interest rate risk: Risk resulting from changing market interest rates that mainly affect fixed income securities. As interest rate changes, the prices of these securities fluctuate, decreasing with rising interest rates and increasing with falling rates. • Liquidity risk: Risk associated with the inability to liquidate an investment usefully and at a reasonable price. However, to be liquid, an investment not only must be simply profitable but also should be so at reasonable price. • Event risk: Risk that some major, unexpected event will occur that leads to a sudden and substantial change in the value of an investment. For example risks posed by natural disaster and corporate takeovers. • Exchange-rate risk: Risk arises from the uncertainty about the value of foreign currency cash flow to investor in terms of his home country currency.. • Sovereign risk: It is essentially the credit risk of a sovereign bond issued by a country other than the investor's home country.
1)Since Persons C and SA are both quite young, have no children, and have good, stable incomes, they should adopt an aggressive investment approach. Since, they are young they have time on their side, and can ride out the ups and downs of the stock market. They will be able to invest more of their money as they have no children. Without children, they have fewer financial obligations and will not require a constant income stream from their investments. Since they have good stable jobs, they will not need income from their investments. They could still fulfill all their financial obligations even if their investments do not pan out. 2)They should invest in Blue Chip stocks, Growth stocks, Tech stocks, Large-cap, Mid-cap and Small cap stocks. Investing in these stocks is suitable to a more aggressive than investing in bonds or Treasuries. This is because the prices of these stocks fluctuate more than those of bonds and Treasuries. Since they can afford to be more aggressive at investing, they should take the opportunity to do so. By selecting many different types of stocks, they will be able to diversify their portfolio. Current income investments are not important to them since they have good, stable jobs that bring in the income they need for their expenses. They could put some of their money into bonds to achieve a more diversified portfolio, but that is not necessary since they are quite young and have plenty of time to wait out any stock market downturns. In addition, interest rates are expected to rise, and this will lead bond rates to fall. 3)Organize the securities in a table as shown below: Invest the remaining $2,982 in a CD. These stocks were selected so that Persons C and SA could have a diversified portfolio, with some Growth stocks; some Large caps stocks, some mid cap stocks, some small cap stocks, some energy stocks and some Tech stocks. These stocks were selected based on their financial health. C is a soft drink company that has been around for a long time. It has low debt, and is financial healthy. As it is a growth stock, it is a good, stable investment to balance out some of the riskier investments. I Corp is a media and internet company, which fits with the Tech stock recommendations for the couple. It is a mid cap stock, which will offer some diversification from large cap stocks. C P is the world's largest independent exploration and Production Company, and specializes in exploring for, producing, transporting, and marketing oil and natural gas. This is a good addition to their portfolio as it diversifies into the energy segment. AP Inc. is a biopharmaceutical company that focuses on the development and commercialization of therapeutics in the field of cancer metabolism and inborn errors of metabolism. It is a small cap stock, which will offer some diversification from large cap stocks. In addition, it diversifies into the medical segment. JC is a financial hold company that provides various financial services worldwide. It is a good addition to their portfolio as it diversifies into the financial services segment. eB Inc. provides online platforms, tools and services to help individuals and merchants in online and mobile commerce and payments internationally. It is a tech stock that aids in commerce, which is not the same kind of tech segment as I Corp. It is a good addition to their portfolio as it offers diversity within the tech segment itself.
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