What is the role of RISK in determining decisions to diversify or how assets are allocated?

Answer the following as a team:

• If Ken really saved $0.25 per week, what return would he have had to earn over 25 years to accumulate $30,000? If you assume a more realistic return of 12% per year, how much would he have to save per week? Answer Questions 1–3 at the end of the case.

Answer the following as a team:

• Roberto has $20,000 in an investment account at his brokerage, invested to earn an expected 13% over the coming 5 years. He is buying an engagement ring for his fiancée, Sarah that costs $12,500. He is considering borrowing the cost of the ring on his credit card that charges him 18% and paying it back over 5 years. Using TVM calculations compare the direct cost of borrowing on the credit card versus the opportunity cost of selling some investments from his brokerage account.

Answer the following as a team:

o Using Exhibit 11-2 in Ch. 11, how do the factors identified in the graphic help determine the level of risk an investor might want to assume?
Exhibit 11–2 Factors That Can Affect Your Tolerance for Risk and Your Investment Choices
Conservative Investments with Less Risk Speculative Investments with Higher Risks
People with no financial training or investment background Investors with financial training and investment background
Older investors Younger investors
Lower-income investors Higher-income investors
Families with children Married couples with no children or single individuals
Employees worried about job loss Employees with secure employment positions
Often beginning investors are afraid of the risk associated with many investments. But remember that without the risk, obtaining the larger returns that really make an investment program grow is impossible. The key is to determine how much risk you are willing to assume.

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