Question

Historically the S&P 500Index has returned about 8% a year but returns are very uneven as recent experience has reminded us - the INDEX declined by more than 50% from its peak in2007 and took 7 years to attain that peak level again. Last year the S & P 500 Index gained over 30% but this year it declined by over 30% in March alone. In contrast a typical Money Market Fund has returned about 2% a year with minimal capital fluctuation. Given these facts, evaluate the following: a) You are considering spending $20,000 to purchase a common stock “S&P 500” Index Fund. Assuming that you plan to use this money as a house down payment1 year from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your specific objective.Very lowVery high risk____________________________ risk 1 2 3 4 5 6 7Briefly explain your decision:b) How risky would it be if you planned to use this “S&P 500” Index Fund as the major component of your retirement funds, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective.Very lowVery high risk____________________________ risk 1 2 3 4 5 6 7Briefly explain your decision:c) You are considering investing $20,000 in a Money Market fund. If you plan to use this money as down payment on a house 1 year from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.Very lowVery high risk____________________________ risk 1 2 3 4 5 6 7Briefly explain your decision:

d) How risky would it be if you planned to use the Money Market fund as the major component of your retirement funds, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective!Very lowVery high risk____________________________ risk 1 2 3 4 5 6 7.Briefly explain your decision:

Answer 1

Historically the S&P 500Index has returned about 8% a year but returns are very uneven as recent experience has reminded us - the INDEX declined by more than 50% from its peak in2007 and took 7 years to attain that peak level again. Last year the S & P 500 Index gained over 30% but this year it declined by over 30% in March alone. In contrast a typical Money Market Fund has returned about 2% a year with minimal capital fluctuation. Given these facts, evaluate the following: a) You are considering spending $20,000 to purchase a common stock “S&P 500” Index Fund. Assuming that you plan to use this money as a house down payment1 year from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your specific objective.Very lowVery high risk__It is very risky (maybe a 5) to use S&P500 as an investment for a short term period as 1 year, as we saw earlier that the returns on stock index can vary from +30% in one year to -30% the next__________________________ risk 1 2 3 4 5 6 7Briefly explain your decision:b) How risky would it be if you planned to use this “S&P 500” Index Fund as the major component of your retirement funds, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective.Very lowVery high risk__ it would be moderately risky but given that this investment is over a 40 year horizon it is likely to earn a decent (maybe double digit) annual returns over this period__________________________ risk 1 2 3 4 5 6 7Briefly explain your decision:c) You are considering investing $20,000 in a Money Market fund. If you plan to use this money as down payment on a house 1 year from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.Very lowVery high risk__this is a good very low risk investment and is likely to yield 2-3% over this investment horizon of 1 year, as we we saw earlier__________________________ risk 1 2 3 4 5 6 7Briefly explain your decision:

d) How risky would it be if you planned to use the Money Market fund as the major component of your retirement funds, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective!Very lowVery high risk___it is a very low risk investment but may not be a good investment since it will yield just 2-3% annual return, whereas investment in a stock index for 40 years could yield much more_________________________ risk 1 2 3 4 5 6 7.Briefly explain your decision: