Answered: Use the Optimistic, Conservative and…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Mr Sng is a retiree in his late sixties. He has $100,000 to invest. He has no regular source of income and no other assets. He is evaluating between 3 different lump-sum financial products shown in Table 3. All products require a minimum investment sum of $100,000. Monetary returns represent the net gain after one year of investing in the product. For example, if Mr Sng chose to invest in Product B, he may lose $5,000 after one year if the GDP growth is negative. He will earn $8,000 if the GDP growth exceeds 2% at the end of the year. If you were in the shoes of Mr Sng, how would you select the appropriate investment product for a time horizon of one year? (i) Use the Optimistic, Conservative and Regrets payoff analysis approaches. State which product(s) Mr Sng should invest in and what monetary return he can expect from each approach (ii) As you have only enough funds for one product, identify the most appropriate investment product. [Hint: Be sure to consider the needs of Mr Sng who is a retiree.] Do provide all equations, workings , tables and graph available

Table 3. Comparison of Returns from 3 Financial Products
GDP Growth
Monetary Returns
Product A (Crypto)
Product B (Stocks)
Product C (Bonds)
<0%
-15000
-5000
2500
0-2%
10000
6000
2500
> 2%
25000
8000
2500

Expert Solution

Step 1

It has been mentioned that on each product a minimum amount of money to be invest is the $100,000 and as such it is the only amount of money which Mr Sng have to invest into any product.