7. A young man who received $2000 for his 13th birthday from his grandparents
1. For this investor, the most realistic goal would be saving in order to buy a car for his 17th birthday. Since he just turned 13, this will give him a 4 year time horizon. Seeing as a decent car is worth about $3000, the investor will need to focus on capital growth – which will be his main objective. He will not require monthly payments and safety of principal will not allow him to buy a decent car. Secondly, the investor will try to minimize taxation so that he can afford a better car, as well as make the investment liquid enough so that he can cash it when he is 17 (avoid 5 or 10 year commitments). Since the investor needs to get as much money as possible throughout these 4 years, his risk tolerance would be medium-high. The investor needs a return that is bigger than his original investment, and since risk and return directly correlate, the investors’ risk tolerance will have to be just as high as his expectations – which are considerably high.
By simply looking at all these factors and at the rating of risk-return of mutual funds (provided by Ms. Santorelli) we can see that the investor must invest in a dividend fund. This is true because the time horizon is considerably long, but not long enough for an equity fund. Also, dividend funds are dependent on market movement and therefore have a medium-high risk, which is equivalent to the investors risk tolerance. Dividend funds allow capital