Posted: December 3rd, 2014

Your client has a moderate aversion to risk. In the current economic environment, which investment would you suggest: stocks or bonds?

Your client has a moderate aversion to risk. In the current economic environment, which investment would you suggest: stocks or bonds? (Be certain to include in your discussion such factors as interest rates and inflation.

For this assignment “ I need you to summarize the student responses to the Discussion question below”.
There’s three students answers to the question. I need to reply to there answers with at least 1 paragraph each.
Thank you
Discussion Question.
Your client has a moderate aversion to risk. In the current economic environment, which investment would you suggest: stocks or bonds? (Be certain to include in your discussion such factors as interest rates and inflation.)

Student responses
Student 1
This is greatly going to depend on what type of investment the person is looking for. Bonds are typically safer bets by providing a set number of payments based off a fixed interest rate. Stocks are based off of the company and how well it is doing. Both are good and bad when it comes to risk. Investing in stock is essentially becoming part of the corporation. If the company does great and the price of the stock grows then the investment will grow with it. Additionally, if the company pays out dividends then the investor will recieve money for this as well. The downside, is if the company has a bad year then the price of the stock could go down, resulting in a loss. Bonds are safer in the fact that the terms of the bond has already been set. The growth is normally slower but safer in regards to the company success. The downside is however that if the company has great years with growth the bond will not see this but instead will only grow at the pre-determined amount. If the individual prefers to avoid risk then investing in a bond in these current times would be best. Another few years from now however, stock investing should become more stable.
Zach
Student 2
For the client that is moderately risk averse, I would suggest dividend investing. This is buying stocks that pay a dividend either quarterly or yearly. I think buying transport stocks would work also, since most of them will benefit from the fall in crude oil prices. For example, UPS and American Airlines have already started to benefit in share prices due to the drop in oil prices. In addition to share price appreciation, UPS currently pays a 2.5% yield and American Airlines pays .9%, which is still better than a savings account. In this low interest rate environment, it does not make sense to keep a large amount of money in a savings account. Inflation is much higher than any savings account rate, so your money will lose value over time. The FED has signaled that they are in no hurry to raise interest rates from their historic lows, which means equities will probably still move higher in the near term.
Another way to achieve income revenue would be to sell covered calls against a stock position. This is basically when you have at least 100 shares of a stock. You can sell one stock option for every 100 shares that you own. You will collect the premium for selling the options. If the stock reaches the option strike price by expiration, the stock is called away from you, but you keep the premium and the profit of the difference of where you bought the stock at and the strike price of the option. Example: If you bought 100 shares of Apple at $105 and you sold one option that expires in a month and has a strike price of $110 for a premium of $1.75. In a month, Apple reaches 110, so you make $175 from the option you sold and also $500 profit from the stock itself.
I would maybe put 10% into bonds as a hedge only because I do not think that bonds will do well since their performance is generally opposite of the stock market. Even though the question doesn’t mention it, it would also depend on how old the investor was. If the investor is in his/her 20’s, I would suggest a less conservative approach since they would have more time until retirement than someone in their 50’s.
Keith
Student 3
For a client with a moderate aversion to risk I would suggest bonds. Bonds offer current income and capital gains and offer less risk. They can also provide higher current income. While bonds are less risky, they are still exposed to some level of risk. Risk is most predominating in interest rate fluctuation and inflation rates. Bonds are also exposed to purchasing power risk, business and financial risk, liquidity risk, and call risk.
Depending on the credit rating of the bond the investor could be exposed to the risk of default. For instance, a bond rated BB or lower gives investors a general idea of the risk they are taking on with the bond. Investopedia.com explains, “the ratings give investors an idea of how likely a bond is to default in payment, (2014).
The investor should be aware that changes in interest rates will affect earnings potential if interest rates are rocky. Bonds are fixed-income securities that move in the opposite direction of interest rate changes. For instance, if the interest rate rises, the market price of bonds will decrease. The opposite occurs when interest rates fall; the market price increases.
Inflation rates also affect the purchasing power of bonds. This is because interest payments are fixed amounts (FinancialWeb, 2014). When the rate of inflation increases, bond prices will fall. Subsequently, if the inflation rate decreases, the bond price will increase.
To err on the side of caution and make the best investment, it would be wise to purchase shorter term bonds with a higher coupon rate when interest rates are expected to decline. Smart, Gitman, & Joehnk, (2014) explain, “this will allow the investor to minimize the price variation and preserve as much capital as possible (pg. 376).
Christina

PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET AN AMAZING DISCOUNT 🙂