The appropriate mix of stocks and bonds changes as a person moves through differ
ID: 2797079 • Letter: T
Question
The appropriate mix of stocks and bonds changes as a person moves through different phases of life in hope of achieving a variety of short- and long-term financial goals. Pick a portfolio consisting of either (i) almost exclusively stocks, (ii) a much larger mix of stocks than bonds, (iii) a much larger mix of bonds than stocks, or (iv) almost exclusively bonds for each of the four individual scenarios below (Note that every portfolio option doesn’t have to be used). Explain why portfolio (i), (ii), (iii), or (iv) makes sense for each person below.
Person A: Saving to place a 20% down payment on a house in 3 years
Person B: Saving to retire in 45 years
Person C: Saving to provide an initial investment for a newborn’s college fund
Person D: Saving to set up a diversified portfolio with a high long-term growth target
Explanation / Answer
Person A - Portfolio iv is suitable because bond will earn regular interest from which the individual can make the downpayment.
Person B - For person B iii portfolio is better as it is long term plan. Bond will give him interest and in the mean time period he can earn more by investing in stocks which is little riskier.
Person C - The perfect portfolio for this person is Portfolio i as it is a shortterm plan. A person can earn short money by investing in stocks.
Person D- Portfolio ii is a good option as it is known that stocks give high retrun over a longer period of time
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