Discussion Questions: 1. Sue Pansky, a retired grade-school teacher, is considering investing in Starting Right. She is very conservative and is a risk avoider. What do you recommend? Since Sue is a risk avoider and is very conservative, I would recommend investing in corporate Bonds. The reason is that her investment of $30,000 is secure to the extent of $20,000 as this amount has been guaranteed by Julia. On the other hand she gets a steady income at the rate of 13% per annum. 2.
Ray Cahn, who is currently a commodities broker, is also considering an investment, although he believes that there is only an 11% chance of success. What do you recommend? Since, Ray Cahn believes that there is only 11 percent of success, in case of preferred stocks his expected returns is 11% X 4 = 44% plus 50% = 94%. In case of common stocks his expected returns is only 88%. So, Ray Cahn should go in for corporate bonds. This is the choice recommended for him. 3. Lila Battle has decided to invest in Starting Right.
While she believes that Julia has a good chance of being successful, Lila is a risk avoider and very conservative. What is your advice to Lila? There are two sets of information about Lila, since she believes that Julia has a good chance of being successful, she should go in for common stock. On the other hand she is very conservative and a risk avoider, so she should go in for corporate bonds. On balance the recommendation for Lila is that she should go in for corporate bonds. 4.
George Yates believes that there is an equally likely chance for success. What is your recommendation? If George Yates goes in for preferred stocks, then his expected returns at the end of 5 years is 4 x 50%= 200% plus 50%. = 200%. If George Yates goes in for common stock then his expected returns is 8 X 50% = 400%. In other words, Yates expects the maximum income when he goes in for common stocks. So Yates should invest in common stocks. 5. Peter Metarko is extremely optimistic about the market for the new baby food. What is your advice for Pete?
Since Peter is extremely optimistic about the market for new baby food, then he expects to get 13% returns on bonds for five years and get back his investment in full. If he invests in preferred stocks, he expects his money to increase by a factor of 4. Finally, if he invests in common stocks he expects his money to increase be a factor of 8. So, since he expects that investment in common stocks to bring in the best returns, he should invest in common stocks. 6. Julia Day has been told that developing the legal documents for each fund-raising alternative is expensive.
Julia would like to offer alternatives for both risk-averse and risk-seeking investors. Can Julia delete one of the financial alternatives and still offer investment choices for both risk seekers and risk avoiders? Yes, Julia Day can delete preferred stocks. The reason is that risk seekers can invest in common stock and the risk avoiders can invest in corporate bonds. As we have seen in the answers above all the five potential investors have either decided to invest in corporate bonds or in common stocks. So, deleting preferred stocks will not transgress on the selection by any of the investors.
Even after deleting preferred stocks there will still be enough choice for her customers. References: www. ehow. com ? … ? Investing ? Investing for Beginners www. moneyinstructor. com/art/risktypes. asp www. cfainstitute. org/aboutus/press/release/… /00invriskb. html hubpages. com/hub/investment-measuringspng. secretstocksociety. com/www. usnews. com ? Money ? New Money www. cbsnews. com/stories/2009/04/02/… /main4912848. shtml www. univ-orleans. fr/deg/GDRecomofi/Activ/bouis_birmingham. pdf www. istockanalyst. com/article/viewarticle/articleid/3742592