1. Suppose one of your coworkers asks your opinion about his plan for achieving a financial goal. He says he wants to save money for a down payment on his first home. He needs $15,000, and he wants to buy the home in one year. He figures he can attain his goal if (a) the stock market earns just 10 percent, compounded annually, in the next year, (b) he can invest his $10,000 savings in the stock market through a mutual fund, and (c) he can contribute $80 per month to his stock market investments. What is your opinion about how he plans to attain his goal, and what advice should you give about how to attain the goal? Please show and clearly label all calculations.
2. Suppose a friend of your says her goals are to meet most financial emergencies and fund her living expenses. She owns her car and home, she isn’t employed, and she has $450,000 invested as follows:
Stock mutual funds (growth and mid-cap) $450,000
Bond mutual funds (high-grade corporate and U.S. Treasury)
Savings accounts $2,000
3. Suppose you’re a financial planner, and a prospective client wants your advice on how much money it will take to retire in 30 years and accumulate $1,000,000 during the period. She already has $43,000, and she wants to know what her annual investment contribution should be. Assume the portfolio will earn 8 percent per year compounded annually. Report the result of your calculations and explain, as you would to the client, how you arrived at the answer.
4. Suppose you own shares in a stock, and you want to reduce the risk that the stock’s value will decline. Name three methods you might use.
5. Give an example of two kinds of assets and an allocation proportion that would be part of a portfolio owned by a 25-year-old investor with goals for funding emergencies and saving for retirement. The investor’s risk tolerance is high.
6. Suppose you’ve studied a corporation for a long time, and you notice that sales have increased in the most recent year. However, the current ratio has declined, and the ratio of earnings to sales has also declined. What conclusions do you draw from these findings?
7. An investor seeks to diversify her portfolio by investing in foreign securities. She’s reluctant to invest in individual securities and rejects managed mutual funds because of their high expense ratios. She might prefer to use _________ for the international part of her portfolio.
8. Whereas novice investors might prefer to invest in mutual funds that report the highest investment returns, experienced investors prefer the __________ return to gauge performance.
9. The sum of the present value of cash flows is always less than the sum of nominal cash flows because present value calculations _____________future cash flows.
10. If an investor seeks a relatively low-risk investment in equity, he or she might use the stock’s _________ _____________ to estimate its volatility relative to the market.
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