Question

Historically the S&P 500 Stock Index has returned about 8% a year but returns are very uneven as recent experience has reminded us - the INDEX declined by more than 50% from its peak in 2007 and took 7 years to attain that peak level again. This year (2019) the S & P 500 Index has gained about 10% through today’s date after declining almost 10% for last year( 2018). It has since recovered. In contrast a typical Money Market Fund has returned about 2% a year with minimal fluctuation. Given this, evaluate the following:

a) You are considering spending several thousand dollars to purchase a common stock “S&P 500” Index Fund. Assuming that you plan to use this money as a house down payment 1 year from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, GIVEN YOUR OBJECTIVE.

Very low                                                                                               Very high

                risk               ____    ____    ____    ____    ____    ____    ____         risk

                                       1          2          3       4        5           6          7

          

Briefly explain your decision: (2 points)

Answer 1

Considering the objective of purchasing the house within a year,the risk of investing the

Downpayment of house in S&P500 index on a scale of 1 to 7 is 5. Based on the above

Information we find that S&P500 is very volatile and returns are uneven.It may provide

healthy returns in a year but the chances of downside are also there given the volatility.

The rating is given 5 because there are also more risky investment in stock market such

as investing in individual stocks,options etc. but we have choosen to invest in index fund

which is little less risky comparetively.

NOTE

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