Problem: Investment should be in blocks of $30,000. Furthermore, each investor should have an annual income of at least $40,000 and a net worth of $100,000 to be eligible to invest in Starting Right.
Corporate bonds would return 13% per year for the next five years. Julia furthermore guaranteed that investors in the corporate bonds would get at least $20,000 back at the end of five years.
Investors in preferred stock should see their initial investment increase by a factor of 4 with a good market or see the investment worth only half of the initial investment with an unfavorable market. The common stock had the greatest potential. The initial investment was expected to increase by a factor of 8 with a good market, but investors would lose everything if the market was unfavorable. During the next five years, it was expected that inflation would increase by a factor of 4.5% each year.
Questions:
1. Sue Pansky, a retired elementary school teacher, is considering investing in Starting Right. She is very conservative and is a risk avoider. What do you recommend?
2. Ray Cahn, who is currently a commodities broker, is also considering an investment, although he believes that there is only an 11% chance of success. What do you recommend?
3. Lila Battle has decided to invest in Starting Right. While she believes that Julia has a good chance of being successful, Lila is a risk avoider and very conservative. What is your advice to Lila?
4. George Yates believes that there is an equally likely chance for success. What is your recommendation?
5. Peter Metarko is extremely optimistic about the market for the new baby food. What is your advice for Pete?