John, age 28, and Emily, age 27, have just had their first child, Lindsey. They have a combined income of $65,000 and rent a two-bedroom apartment. For the past several years, John and Emily have taken financial responsibilities one day at a time, but it has finally dawned on them that they now must start thinking about their financial future. Recently, John has noticed the stock market begin to move higher, and he is convinced that they should be investing in stocks. Emily is more interested in investing in collectibles such as sports memorabilia because shes been reading reports of baseball trading card speculators making huge profits. When asked what their goals are, John replies that hed like to save for retirement, and Emily mentions her top priority as saving for Lindseys college expenses. They both agree that theyd like to buy a house and pay off $4,000 in credit card bills. When asked to list their investments, all they can come up with is a savings account worth $950.

Questions

1.What should be John and Emilys first priority before investing or making any investment plans?

2. If John and Emily asked you to prioritize their goals, how would you rank their investment objectives? Now, match some investment alternatives to their objectives.

3.John and Emily are in the 15 percent tax bracket. Using a financial calculator and the investment category compound average returns for stocks, bonds, and Treasury bills given in Figure 11.3, determine the total nominal value (assume inflation is zero) of their portfolio if they invest $2,000 per year for 40 years in common stock. What is the portfolio value if they invest in government bonds? How about Treasury bills?

4.Should John and Emily invest all their money in one investment strategy (stocks or collectibles)? Explain your answer in terms of diversification and the asset allocation process.

5.Given the information in Figures 11.3 and 11.4, explain why anyone would invest in government or corporate bonds.