Please reply to the discussion post below from a classmate. Please provide an an

Question

Please reply to the discussion post below from a classmate. Please provide an answer and references. Thank you in advance!

Post from a classmate: A real life application of the material we have covered has been pretty substantial for me. Over the past few modules we have spent a lot of time looking at stocks and bonds and determining their present and future values. With all of that information, I have spent more time in the last few weeks learning more about stocks and bonds than any previous knowledge or experience I had with them. With the knowledge that I had gained, I have had a much better understanding of how stocks and bonds work and decided to consult with a financial manager and started investing (although small amounts) in stocks and bonds to have a diverse portfolio with some solid earning potential down the road.

Explanation / Answer

The valuation is present value of cash flows from an asset. With stocks, the cash flows are unknown because they come from dividend payments and capital gains (or terminal value). With bonds, the cash flows are known because they come from fixed coupon payments and par value (or selling price if one sells bond before maturity). One should diversify the portfolio to minimize the risk and if one allocates some of his portfolio to stocks and some to bonds, his risk will be optimised.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.