Question

1. What are 2 factors that determine how much investors put into stocks versus bonds?

2. Assume the long-term average return for bonds is 6% and for stocks is 10%, what is the effect of shifting some weight from bonds to stocks? imagine that you are 35 years away from retirement and you plan to contribute $10,000 per year for the next 35 years to your portfolio which is currently split equally between stocks and bonds (i.e. $5,000 goes into stocks and $5,000 goes into bonds each year). How much more would you have at your retirement in 35 years if instead of 50/50 split if you had invested 70% in stocks (i.e. $7,000) and only 30% in bonds (i.e. $3,000)?

Answer 1

1. The Factors related to it are that stock may give high return as compared to the bonds and also the second factor is that Those person who has the ability to take risk for taking high return

2. If we shifts the weights of investments from some bonds to the equity Then the person gets more return in future as Return on bond is 6% and on stock is 10% but the condition is that the risk of the portfolio is also increased If  

Case 1. The total amount received at the time of retirement after 35 years if made 5000 in bonds and 5000 in stock is

Value of bond after 35 years is 5000 * FVAF ( 6% , 35 years) = 5000*117.0608 = 585304

Value of stock after 35 years is 5000 * FVAF ( 10% , 35 years) = 5000*297.026 = 1485134.026

total value = 2070438.026

Case 2. The total amount received at the time of retirement after 35 years if made 3000 in bonds and 7000 in stock is

Value of bond after 35 years is 3000 * FVAF ( 6% , 35 years) = 3000*117.0608 = 351182.4

Value of stock after 35 years is 7000 * FVAF ( 10% , 35 years) = 7000*297.026 = 2079187.63

total value = 2430370.03$