How do you make decisions that are expected to generateincome?
At different stages of your life, you will evaluate investmentoptions based on the expected cash flows that they are likely toproduce – a process that hopefully will help you to make informeddecisions. Think about the various way you might invest money togenerate income in the future, and how you will make these types ofdecisions. For this assignment, suppose that you have been given$10,000 with the requirement that you "invest" it in one of the 3different options below. Research the expected return andassociated risk for each of the following:
- Pay down your student loan or credit card debt. Although thisis not technically an investment, it is effectively the same asearning a "risk-free" rate of interest. Alternatively, you can keepthe cash in a riskless (FDIC insured) bank account. Current ratesare available on a number of different sites such asBankrate.com.
- Invest in any stock(s) of your choice. Research the company onYahoo Finance or other financial site, and get statistics regardingthe expected risk and return for this investment. Be very specificabout why you selected this company.
- Invest in a real estate rental property. Research propertyprices, rents, and expenses for residential income properties orget basic information from a property management site such asMashvisor or Roofstock. Note that a "cap rate" or "cash-on-cash"return is like a dividend yield for a stock, and is calculated asnet operating income (rental income less expenses) divided by theprice.
There are no wrong answers, but you must justify your opinionsusing the concepts that you have learned in this course. Be sure toinclude all factors used in making your evaluations, and bespecific about your conclusions. To receive full credit, youranswers must be well thought out and well-written.
Answer ALL 4 questions below:
- Before making any calculations, which option appeals to you themost?
- What methods would you use to evaluate these options? Compareeach option in terms of current yield, potential for appreciation,and estimate an approximate long-term total return.
- Which option offers the best potential return given its levelof risk? Which one would you choose given your level of riskaversion? Explain in detail.
- What sort of capital investments do you think you might make inthe future? What other investments (such as owning your own companyor investing in a start-up) would you consider? Why? Are there anyfactors in addition to monetary gain that you would consider?
