South Carolina Case

Olivia Flowers

FIN 322-02

Assignment #1

1. At the time, South Carolina only invested in government and corporate bonds and the returns were below the assumed rate of the pension fund. Investing in equity securities reduces risk and has higher long-term returns than bonds. With part of the pension fund invested in equity securities, the portfolio has more diversification and reduced risk since there would be a 40% cap on the amount that would be invested in stocks.

2. Discuss pros and cons of investing in the stock market

Pros

* higher  rate of return

* portfolio diversification

* less risk

* bond prices fluctuate with interest rates

Cons

* investing in the wrong stocks could negatively affect 40% of the portfolio

* never completely risk free

3. Discuss the risk and return relation for stocks and bond.

  | Inflation | Treasury Bills | Treasury Bonds | Corporate Bonds | Corporate Stocks |

Mean | 3.198 | 4.028 | 5.572 | 5.822 | 12.958 |

Standard Deviation | 4.512 | 3.513 | 9.214 | 9.091 | 20.319 |

Treasury Bills: The risk and return are both low for treasury bills because they are short term securities. The risk is much lower compared to other assets and are the safest investment for individual investors, even though the return won’t be as high compared to bonds.

Treasury Bonds: The risk associated with treasury bonds is higher compared to treasury bills, but lower than corporate stocks. The return is also slightly higher than treasury bills, but is paid at maturity of more than seven years.

Corporate Bonds: The return rate of corporate bonds is higher compared to Treasury bills and bonds, but lower than corporate stocks. The risk is also higher because the investor faces both interest rate risk and the corporate issuer defaulting.

Corporate Stocks: Corporate stocks have the highest risk and return compared to the other assets. Corporate stocks generally have consistent returns to investors, but there...