Question

2. Find the most recent (30 days) common equity return for any large company (relatively safe). Compare this return to the performance of treasury with the same maturity. Why common equity is not a money market security? Explain why common equity is not a good choice for short-term investment.

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Answer 1

The current 30 days T bill Yield = 2.38% (Money market security)

The Return on equity for Amazon is 28.48%

When we compare this, the return on Amazon is very good when compared to the t-bill rate. This is because the T-bill is a risk free security and equity is a risky asset class which shows the the same return may not be repeated again.

Because of the inherent risk in equity, common equity is not the same as a money market instrument. Because of the possible downside in the short term, it is not considered as a short term security. For example Amazon can give a negative return in the next month and this will create huge losses for investors with a short term horizon.