Problem 1. Consider three investors. 1. Bryant is a 25-year old young professional, employed in a major city in the northeast. Since joining the workforce three years ago, he contributes as much money as possible to his retirement accounts which is invested in a diverse set of index funds. An avid fan of Benjamin Graham’s “The Intelligent Investor”, he has decided to consider a few individual stocks of companies with good and stable long-term prospects as well as a great management. 2. Nicole is 52 years old, and a few months ago, she retired from her well-paying job after aggressively saving and investing her money prudently for much of her life. While she could go back to work if necessary, she prefers her financial independence. In order to maintain a steady cash-flow, her portfolio is heavily geared towards high yielding stocks, allowing her and her family to live of dividend payments for the most part. Aware of the downturn of General Electric and their dividend cut, she focuses on companies from which she expects a solid and steady dividend growth. 3. Peter is in his mid 30s. He did not start a well-paying job until two years ago, and therefore, he is behind on his retirement savings. To make up for lost time, he is contributing the maximum allowed to his individual retirement account (IRA), which is invested in market ETFs. Additionally, he sets aside $10,000 every year for the next ten years for risky high-growth investments. Following up on our group exercise in class, discuss if the stocks of Amazon (AMZN), Target (TGT), General Motors (GM) and Tesla (TSLA) are suitable investments for these three investors. Explain why or why not. Problem 2. Next week, we will start a stock market game. You will be given $100,000 in equity, and you can borrow up to $100,000 more in margin. Write a report (400-500 words) describing your investment philosophy. Discuss how you want to allocate your funds across asset classes (bonds, stocks, as well as countries) and the reasoning behind your allocation. If you are going to invest in specific companies, describe how you have selected your securities. The report should describe your investment goals and the strategy which you’re pursuing to achieve these goals. To this end, make sure you elaborate on the following points: • Classify investments into growth stocks vs. value stocks or small firms vs. big firms. • Explain your risk management, e.g., how is your portfolio hedged against market downturns?
