Question

Find the current 30-days T-bill yield. Will you consider investing in this security given the current market conditions?

Find the most recent (30 days) common equity return for any large company (relatively safe). Compare this return to the performance of treasury with the same maturity. Why common equity is not a money market security? Explain why common equity is not a good choice for short-term investment. (I chose Costco which has a ROE of 26.62%)

Answer 1

The current 30 days T bill Yield = 2.40%

The decision to invest in this is not based on the current market situation, but the length of time of my investment. If my investment horizon is less than one year, I would consider investing in this security. If my time horizon is more than one year, I would not invest in the T-bill

The Return on equity for Costco is 26.62%

When we compare this, the return on Costco is very good when compared to the t-bill rate. This is because the T-bill is a risk free security and equity is a risky asset class which shows the the same return may not be repeated again.

Because of the inherent risk in equity, common equity is not the same as a money market instrument. Because of the possible downside in the short term, it is not considered as a short term security. For example Costco can give a -26.62% in the next month and this will create huge losses for investors with a short term horizon.