Question

You are planning for retirement and must decide whether to purchase only your employer’s stock for your 401(k) or, instead, to buy a mutual fund that holds shares in the 500 largest companies in the world. From the perspective of both idiosyncratic and systematic risk, explain how you would make your decision.

Answer 1

I would suggest investment in mutual funds that hold stock of largest 500 companies of the world because stocks of larger companies offer less volitality and offer a steady return if not bumper returns

Blue-chip stocks are highly priced market stocks, which have emerged as a preferred investment option over recent years.

The companies that issue blue-chip stocks are highly esteemed in the stock exchange market and tend to have a stable financial record and credibility.

Besides their repute, the fact such companies extend attractive dividend pay-outs can be credited for the growing popularity of the said stock.

benefits of investment in such mutual fund is as follows -

• Assured returns: Blue-chip stocks generate returns quarterly in the form of dividends. The fact that companies that are well-established also serve as a safe investment avenue for most investors. With this safety comes the assurance of earning steady but guaranteed returns.

• Credit-worthiness: Blue-chip companies have enough capital to clear their financial dues and obligations easily. This, in turn, makes the shares issued by such companies high in creditworthiness.

• Risk factor: Since big companies with stable financial performance issue these stocks, the risks factor associated with blue-chip companies are comparatively less. Investors can further reduce the burden of risk associated with blue-chip shares by diversifying their investment portfolio.

• Investment horizon: The term of investment is usually over 7 years. Such extended term makes Blue-chip suitable for achieving long-term financial goals owing to its long investment horizon.

• Growth prospect: Blue-chip companies are those large companies that have reached their maximum growth potential. This influences the Blue-chip shares who undergo slow but steady growth over time.