Question

• A portfolio is an individual investor’s choices of stocks, bonds, mutual funds, and other types of investment. Pretend that you face these six choices for investments:
  1. a stock that has appreciated in value by 25% in each of the past 5 years and pays no dividends;
  2. a stock that has appreciated by 5% in each of the past 5 years and pays an 8% dividend each year;
  3. a bond that returns 5% each year;
  4. a mutual fund of international stocks that has appreciated by as much as 45% but depreciated by as much as 30% during the past 10 years;
  5. a mutual fund of US consumer products company stocks that has consistently appreciated by 12% for the past 5 years;
  6. a mutual fund of bonds that has consistently appreciated by 7% for the past 10 years.
• Choose three of these investments for your portfolio. What are your investment objectives? Why did you choose those three?
• Provide rationale and examples to support your thoughts.

Answer 1

Here there are six choices of investment.

The selection will depend on our Objectives and Risk taking.

I am a Risk averse individual, who is not willing to take much risks unless there is a premium attached to it but is having a huge amount requirements after 10 years of time. So I am willing to take certain risk to earn higher returns if that return is probable.

My Selection would be

1. A Stock that appreciated by 25% every year over the last 5 years and pays no dividend

I choose this because this stock had huge growth in it and will give me higher return on investment after 10 years. Also I dont need major amounta during these years, so dividend is not a factor

2. A mutual fund of US consumer products company stocks that has consistently appreciated 12% over last 5 years

Mutual funds are less risky compared to stocks and return is also more guaranteed. This will give a higher rate of appreciation when compared with stock appreciating 5%.

3. A mutual fund of bonds that had consistently appreciated by 7% over last 10 years

These mutual funds will help having some fixed amount at the end of 10 years and this better than a normal bond paying 5% annually. We also do not want any cash dividend or interest in these years as my requirement is after 10 years, so I choose all the growth bonds.

I have not selected the stock which appreciated by 5% each year and paying 8% dividend because there is a mutual fund of stock which give 12% annual growth and are less risk compared to original stock purchase.

I have not selected mutual fund if international stock beacuse there is risk of loss.

I have not selected the bond that returns 5% a year because there is another mutual fund on bonds that consistently appreciated at 7%