Question

Quality of decisions, risk appetite, bias Maria and Tracey became good friends while working at the same company. Two years ago, they both decided to increase their savings so that they could eventually purchase homes. Each began by putting a portion of every paycheck into a savings account. At the end of the first year, they had each accumulated $4,000. Because their savings accounts paid a very small interest rate, they decided to invest the savings to earn a higher rate of return. Maria and Tracey both hoped to save enough money to buy homes within five years.
Maria decided to take an investment course offered through the company. The course taught her about different types of investments and strategies for investing. She then purchased and read an investment book to learn more. She learned that some investments are riskier than others, and that investors must balance risk against desired return. Higher risk leads to higher returns on average; however, higher risk could also lead to low returns or even loss. She also learned that investment advisors recommend diversifying risky investments. One way to diversify is to invest in mutual funds, which invest in many different organizations. Maria decided that she was willing to assume some risk, but was not comfortable with a high level. She decided to invest her $4,000 in a stock market mutual fund. She read Consumer Reports to learn about different mutual funds and selected a fund that invests conservatively in fairly stable companies. However, the stock market did not do well in the first year. The value of her mutual fund at the end of a year was $4,050.
Tracey talked with her boyfriend and other friends about how they invest. Her boyfriend’s cousin recommended investing in a start-up company that sells video games. He told her that the games were very hot with teenagers and that the company would probably be acquired, resulting in big gains for investors. This opportunity sounded good to Tracey, so she decided to invest her entire $4,000 in the company’s stock. After 10 months, she was excited to learn that the company was being acquired. She received stock in the acquiring company in exchange for her original stock. At the end of the year, the market value of her stock was $8,200.


REQUIRED:
Evaluate the quality of the investment decisions made by Maria and Tracey. Refer to Exhibit 1.7.
A. List the information used by Maria in making her investment decision.
B. List the information used by Tracey in making her investment decision.
C. Did Maria appears to use high-quality information? Explain.
D. Did Tracey appears to use high-quality information? Explain.
E. Describe Maria’s decision-making process. What did she do to explore her options? Did she appear to be biased? What were her priorities and her risk appetite? How did she reach a conclusion?
F. Describe Tracey decision-making process. What did she do to explore her options? Did she appear to be biased? What were her priorities and her risk appetite? How did she reach a conclusion?
G. Did Maria appears to use a high-quality decision-making process? Explain.
H. Did Tracey appears to use a high-quality decision-making process? Explain.
I. Given your analyses of the information and decision-making processes used by Maria and Tracey, which investor made a higher-quality decision?Explain.


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  • CreatedJanuary 26, 2015
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