DQ Case Solution
The downside to investing in mutual funds is that they have a high cost in relation to the returns they produce. This is because investors are not only charged for the price of the fund but also pay other fees.
Invest in Stocks only
Following are benefits and costs of investing in Stocks;
• Stock Vs. Cash
History tells us that the stock market has always left cash behind in the long term and more importantly it protects the investment against inflation.
• Long Term Growth Prospective
One of the attractions of the stock market is the long term growth prospective. By compounding returns and dividends,investors create considerable wealth over the long term.
• Risk Tolerance
By investing in the stock market, investors are able to select their risk tolerance. If they require low risks,then they should invest in reputable companies with excellent track records. On the other hand, if investors desire higher returns, then they can consider investing in riskier growth companies.
• Extra Risks
Investing in the stock market can be risky as the value of the investment can decrease as well as it would increase. Stock trading is a business, which involves risk.
Invest in Low Risk Government Security
A treasury bill is a short-term bond issued by the Treasury Department of a government. Thismeans that the investor lending money to the government.
• Safest Security
They are one of the safest investments one can buy. The government can make its own currency; there fore there is no chance that one won’t be paid back.
• Transaction Cost
Government securities can be directly bought from the Treasury department. Buying from the Treasury is commission-free. When they mature, then they are turned in and initial investment is received and returned back, also without incurring fees or commissions.
• Rates of Return
Given the safety, they offer low yields as compared to other investments.
Invest in a portfolio
Portfolio theory suggests that investors should not invest all moneyin any one investment or similar investments as this exposes them to the risks of that.
Following are benefits of investing in a diversified portfolio;
An investor allocates capital in a prudent way in order to gather the benefits of having exposure to different financial markets. By creating a diversified investment portfolio, which includes more than one investment category, investors benefit from fewer risks.
By investing in a portfolio, an investor can guard his capital and also position the portfolio to earn profits so that he is prepared for unexpected events.
By constructing a portfolio an investor can enhance his income for the near term. For instance, contributing a proportion of assets to dividend-paying stocks will create a secure income stream for distributions.
An investor who directs capital into the financial markets as opposed to other investment choices, such as real estate, is likely to get money in a timely manner when needed.
The calculations in the Exhibit 1 are performed based on the theory of Capital Asset Pricing Model (CAPM), which calculates how much an investor should accept from investment after considering the systematic risks taken by the investor. The CAPM model calculates systematic risk by multiplying the risk factor for an investment, which is also called beta, this represents the risks that an investment has as compared to the market with the market premium offered by the market.
Based on the calculations performed (Exhibit 1), it can be seen that expected return on investment is highest for First Global Bank, which is 22%, it should also be noted that this rate does not represent the return rate that the investment will actually yield instead it is the rate that should be expected by the investor. Moreover, if in actual the return is below the expected rate,then the investor has made a bad investment as he did not receive as much return as the risks taken by him…………………
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