Pfin (book Only)
6th Edition
ISBN: 9781337117029
Author: Billingsley, Randy; Joehnk, Michael D.; Gitman, Lawrence J.
Publisher: Cengage Learning
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Textbook Question
Chapter 12, Problem 5FPE
Assume that you’ve just inherited $500,000 and have decided to invest a big chunk of it ($350,000, to be exact) in common stocks. Your objective is to build up as much capital as you can over the next 15 to 20 years, and you’re willing to tolerate a “good deal’’ of risk.
- a. What types of stocks (blue chips, income stocks, and so on) do you think you’d be most interested in, and why? Select at least three types of stocks and briefly explain the rationale for selecting each.
- b. Would your selections change if you were dealing with a smaller amount of money—say, only $50,000? What if you were a more risk-averse investor?
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Students have asked these similar questions
1. You are analyzing two possible stock market investment strategies. For each of
the following, identify whether or not it would be classified as a fair bet. Would
a risk-averse person make either of these investments? Why or why not?
a. One strategy is to invest in a blue chip stock like Microsoft that has a proven
track record. There is a 25% chance that the company continues its steady
growth and your wealth increases by $30,000. There is a 75% chance that the
company becomes unprofitable and your wealth decreases by $10,000.
b. Another strategy is to invest in a start-up. There is a 10% chance that the
company is a success and your wealth increases by $100,000. However, there
is a 90% chance that the company fails and your wealth decreases by $20,000.
Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities.
Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment:
Stocks
Bonds
Commodities
Probability Return Probability Return Probability Return
20%
15%
0.15
20%
0.6
10%
0.2
0.2
12.5%
0.4
7.5%
0.2
0.25
0.2
0.4
3.8%
0.2
0.2
0%
To maximize your expected return, you should choose
O A. commodities.
B. bonds.
OC. stocks.
OD. All of the portfolios have the same expected return
2B) You have $600,000 to invest in the stock market. Suppose you invested one-third of your wealth in stock Q and the rest in stock L. These stocks have the following characteristics: Stock Q has an expected return of 10% and a standard deviation of 7%. Stock L has an expected return of 18% and a standard deviation of 11%.
Determine the expected return and standard deviation on a portfolio of stocks Q and L, when the two stocks are uncorrelated and when they are negatively perfectly correlated.
Interpret and compare your answers in these two cases.
Chapter 12 Solutions
Pfin (book Only)
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