Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN: 9780357033609
Author: Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher: Cengage Learning
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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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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
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.
You want to create a portfolio equally as risky as the market, and you have $500,000 to
invest. Information about the possible investments is given below:
Asset
Stock A
Stock B
Stock C
Risk-free asset
Investment
$135,000
$145,000
Beta
.80
1.25
1.40
How much will you invest in Stock C?
How much will you invest in the risk-free asset?
Investment in Stock C
Investment in risk-free asset
(Do not round intermediate calculations and round your answers to 2 decimal places,
e.g., 32.16.)
Chapter 12 Solutions
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
Ch. 12 - Describe the various types of risks to which...Ch. 12 - Prob. 2LOCh. 12 - Prob. 3LOCh. 12 - Prob. 4LOCh. 12 - Prob. 5LOCh. 12 - Prob. 6LOCh. 12 - What makes for a good investment? Use the...Ch. 12 - An investor is thinking about buying some shares...Ch. 12 - The price of Outdoor Designs, Inc. is now 85. The...Ch. 12 - The Castle Company recently reported net profits...
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