Question

1. Apply What You’ve Learned - Investing in Stocks and Bonds

Scenario: You are 30 years old and willing to invest $2,000 every other month for the next 15 years. You prefer a conservative-to-moderate investment strategy and have a risk-averse to risk-neutral tolerance for risk. Your highest priority in your investment strategy is preparing you and any family that you might have in the future for your retirement. You also regularly set aside money into savings and CDs to pay for vacations or similar large-ticket items. You've assembled a table of information and company descriptions for some new stocks and bonds that you are thinking about adding to your investment portfolio. Currently, your portfolio consists of 20 blue-chip stocks, and you're thinking about increasing your diversification by adding some different types of stocks.

The following are descriptions of potential firms to be added to your portfolio:

•	Celestial Crane Cosmetics, Inc. is its industry leader with sales of $1.25 billion. It is a safe and solid investment, and has a beta of 1.0.
•	Blue Panda Ice Cream Company's sales and profits are tied to customer incomes and the state of the economy. As a result, it has a beta of about 1.0.
•	Black Sheep Broadcasting has the lion's share of the market and has widespread name recognition. The company earns above-average earnings, pays reasonable dividends, and has a high P/E ratio. It has a beta of 1.75.
•	Lumbering Ox Truckmakers has invented a truly new product that may revolutionize its industry. Lumbering Ox's share price is rising but if the company can't get its essential inventory and critical components or if its marketing plan isn't successful then its sales and profits will decrease significantly and the company could fail. The result is a fluctuating P/E ratio and a beta of 2.30.

If you wanted to invest in a blue-chip stock company (based on index), you should invest in _____________ . (Lumbering ox truckmakers / Black sheep Broadcasting / Blue panda ice cream company / Celestial crane costmetics Inc.)

If you wanted to invest in a cyclical stock company, you should invest in ________________ . (Lumbering ox truckmakers / Black sheep Broadcasting / Blue panda ice cream company / Celestial crane costmetics Inc.)

If you wanted to invest in a growth stock company, you should invest in ____________________ . (Lumbering ox truckmakers / Black sheep Broadcasting / Blue panda ice cream company / Celestial crane costmetics Inc.)

If you wanted to invest in a speculative stock company (based on industry), you should invest in ___________________ . (Lumbering ox truckmakers / Black sheep Broadcasting / Blue panda ice cream company / Celestial crane costmetics Inc.)

Now, think about the available attributes of common and preferred stock issues and bond issues, and answer the following questions.

If you want to invest in a security that pays you a stable cash flow every six months, then you should consider investing in__________________ . (Preferred stock / Common stock / Bonds)

If you want to invest in a security that allows you to participate in the selection of a company’s management team, including its board of directors, then you should invest in______________ . (Preferred stock / Common stock / Bonds)

If you want to be able to purchase additional shares before new shares are offered to the public, then you should ensure that common shares have a __________________ . (Market right / Preemptive right / Proportional right)

Assume that you’ve selected the investments that you want to add to your portfolio. Now you must consider who to contact to make the purchases and the types of orders to place.

If you wanted to discuss and verify your ideas with a real person (broker) and review firm-provided research reports, then you should use ______________ . (an online discount brokerage / a full service brokerage firm)

If you wanted to place a buy order that requires your new shares to be purchased at the best possible price that does not exceed a specified price, then you should ask for a _________________ order. (Stop loss / Market / Limit )

If you wanted to place a buy order that requires your new shares to be purchased at the current prevailing price with no other limits or special instructions then you should ask for ________________order. (Stop loss / Market / Limit )

Answer 1

(a) Celestial Crane Cosmetics: because it is the market leader in its segment & is safe and solid

(b) Ice-cream companies are cyclical in nature. Blue Panda Ice Cream Company

(c) Growth stock company: Black sheep Broadcasting, this is because its earnings are growing at a high rate

(d) speculative stock company: Lumbering ox truckmakers, this is because its future stock price depends if it can get its inventory right which will require speculation

available attributes of common and preferred stock issues and bond issues

(a) Bonds: this is because bonds pay coupons every six months (or any other periodic interval)

(b) Common stock: this is because bond holders do not have any voting rights. Preferred stock also has only limited voting rights.

(C) Market right: shareholders are given first preferance if they want to buy new shares

consider who to contact to make the purchases and the types of orders to place

(a) a full service brokerage firm (this is because discount brokers do not provide such value added services. They might have an algo advisory which cannot discuss in detail all your plans)

(b) Limit order. A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher

(c) Market order. A market order is a buy or sell order to be executed immediately at the current market prices