Question

Scenario: You are 40 years old. Your investment portfolio currently consists of: (1) a savings account, with a $16,000 balance, (2) certificates of deposit (CDs) worth $20,000, and (3) an investment portfolio consisting of 40% bonds, 40% equities, and 20% cash and cash equivalents. Your bonds are thirty-year U.S. government bonds, while your equities are made up solely of your employer’s stock. Your cash holdings consist of your savings account and CDs. Your employer’s stock paid a 1% dividend and its market value has increased 10% over the last year. The bonds have paid 4.0% interest. The rate of inflation is 3.0%. Your investment goals are mainly focused on retirement, and you have no large purchases planned in the short term.

The value of your current investment portfolio is (180,000 or 144,000 or 108,000 . This consists of 36,000 or 100,000 or 80,000 in cash and cash equivalents, 108,000 or 72,000 or 54,000   in bonds, and 90,000 or 72,000 or 54,000 in equities.

Given the existing composition of your investment portfolio, how would you characteristic your investment strategy? Is it conservative, moderate, or aggressive?

A. The investment strategy is aggressive.

B. The investment strategy is moderate.

C. The investment strategy is conservative.

Given the existing composition of your investment portfolio, how would you characterize your risk tolerance? Are you risk averse, risk neutral, or risk seeking?

A. You appear to be risk neutral.

B. You appear to be risk seeking.

C. You appear to be risk averse.

Think about the government bonds in your portfolio. To what kind of risk are you most susceptible because of this investment?

A. Liquidity risk

B. Inflation risk

C. Business failure risk

D. Marketability risk

E. Foreign exchange risk

The real return on your government bonds is 12% or 1.15% or .95% or 1% .

Think about the stock in your investment portfolio. To what type of risk (or risks) are you most susceptible?

A. Both market (systematic) and random (nonsystematic) risks

B. Only liquidity risk

C. Pure risk

D. Only random, or nonsystematic, risk

E. Only market, or systematic, risk

Do you perceive a deficiency of some type in your equity holdings, and if so, of what type?

A. Yes, my current equity holdings are inadequately diversified

B. No, my current equity holdings are appropriately diversified

C. No, it is better to invest in one company that you know really well than in companies you don’t know as well

D. Yes, according to the concept of asset allocation, I have too much stock in my portfolio

Answer 1

The investment strategy is conservative.

this is so because most of the money is either in cash or certificates of deposits. Portfolio also consists 40% of bonds with 6% interest rate and 40% equities are also only of the employer's stock. The rate of appreciation and dividend is also very low on this stock. Hence due to all these factors we can say the strategy is conservative.

You appear to be risk averse

Base on the investments made and portfolio, we can say te investor is very risk averse and is playing safe.

Inflation risk

If there is an increase in inflation int he country and the rate is higher than the interest rate of bond, then the net return will be in negative.

A. Both market (systematic) and random (nonsystematic) risks

B. Only liquidity risk

Since the money is invested only in one company it attracts liquidity risk, as it would be difficult to sell off. Secondly, market and random risks are both applicable.

Yes, my current equity holdings are inadequately diversified

This is because all of the equity portion is invested in only company. Any adverse activity relating to the company will result in heavy losses. Hence he should diversify his portfolio.