Question

Evaluate each type of asset with regard to risk and return assuming that it makes up the majority of a 22

year-old’s retirement portfolio.

A.   U.S. Treasury bonds

B.   Managed mutual funds invested in corporate bonds

C.   Managed equity mutual funds invested in energy stocks

D.   Equity mutual funds indexed to the S&P 500

Answer 1

The Risk Return Profile

US Treasury Bonds - They are considered to be risk free. The reason is US Government can print money to repay the debt theoritically. Only risk they can have is interest rate risk if they are traded in between and no risk if hold to maturity. Since they have the least risk, they generate lower returns

Managed Mutual Funds invested in Corporate Bonds - They are moderately risky. The reason being while US Treasury bonds have only some bit of interest rate risk if traded and not hold to maturity, Corporate Bonds also carry credit risk, as a corporate can default in it's payment of dues. Thus they are riskier but generate better returns.

Managed Equity Funds invested in energy stocks- Equity is considered to be one of the most risky products. A portfolio comprising of energy stocks can have risk of price movement due to supply of energy. Also the protfolio has risk of fund manager discretion because in order to generate higher alpha, fund manager can end up taking higher risk. Thus are riskiest of the aboe composition and can give the best returns among the above

Equity Mutual Funds indexed to S&P 500 - They carry same risk as above , but they are saved from fund manager risk, As the fund is focussed on beta rather than alpha. They are riskier than corporate bonds and Tbills but less risky as compared energy stocks funds, They will normally give return better than TBills and Corporate Bonds but lesser than Energy Stocks Funds