Imagine that you have $100,000 to invest. You are going to invest it all in one investment for the next 5 years at which point you will revaluate both your investment and personal situations.
You will invest it all in one of the following investments. These are your only 2 options.
A) Bank account earning 5% per year.
B) Common stock of an assigned company.
You will be performing the analysis from the perspective of an investor who is 25 years from retirement and the investor’s income is greater than living expenses. The investor has a liquid net worth of $1,000,000 of which 40% is invested in the S&P 500 index, 40% in a medium-duration, high quality bond fund and 20% in a savings account earning 5% interest per year. You are to determine if the investor should take $100,000 from the savings account and purchase $100,000 of this company’s common stock.