Alex is a young investor with high risk tolerance level and hopes to earn money as...

Alex is a young investor with high risk tolerance level and hopes to earn money as fast as he can. Analyse each of the following plans and evaluate which is the most suitable plan for Alex. 12m (450words)

Dollar-cost averaging
Constant-dollar plan
Constant-ratio plan
Variable-ratio plan

Solutions

Expert Solution

Constant-dollar plan would be most suitable for Alex as Alex being a high risk tolerant investor.

Dollar-cost averaging is an investment strategy in which an investor plans to invest a total sum of money by dividing the total money across periodic purchases of a target asset so as to reduce the impact of volatility (risk) on the overall purchase. This is suitable a suitable strategy for a low risk tolerant investor whereas not so suitable for high risk tolerant investors.
Constant-dollar plan is an investment strategy for investing in which a constant dollar amount in stocks, with other investments in bonds or short-term securities. In effect, this plan forces the investor to sell stocks in rising markets and purchase them in falling markets, thus making it a aggresive strategy making it suitable for high risk tolerant investors like Alex. This strategy possess high risk with high rewards.
A constant ratio plan is an investment strategy, which keeps the aggressive (high risk) and conservative portions (low risk) of a portfolio set at a fixed ratio. When this ratio differs for the desired value, investor is required to make active changes in the portfolio to make the ratio close to desired value. This strategy is more suitable for less risk tolerant investors and less suitable for high risk tolerant investors.
The variable-ratio plan is an investment strategy which uses a variable proportion of risky investments to safer investments, such that when the prices of the risky securities are low, more money is invested in them, but when they are high, they are sold, placing the proceeds in conservative investments. These strategy also involves active portfolio management by changing the ratio. This strategy is for low to medium risk tolerant investors.

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jeff jeffy answered 1 year ago

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