Question

Investment companies attempt to explain to investors the nature of the risk the investor incurs when buying shares in their mutual funds. For example,

go to https://personal.vanguard.com/us/funds/ vanguard/all?sort=name&sortorder=asc.

a. Select the bond fund you would recommend to an investor who has a very low tolerance for risk.Justify your answer.

b. Select the bond fund you would recommend to an investor who has a higher tolerance for risk and a long investment horizon. Justify your answer.

Answer 1

a) For an investor with very low tolerance, money market funds like VMFXX or VMSXX would be suitable because money market funds have very limited risk but which also result in low returns.

b) For an investor with higher risk tolerance, equity funds would be ideal. Global equity funds like VWIGX or VHGEX have high risk due to investment in different countries which leads to higher political and foreign exchange risk along with other risk associated with equity investments.