1. a) Explain how dollar cost averaging affects your returns when drawing down your portfolio, for example,...
Question:
1.
a) Explain how dollar cost averaging affects your returns when drawing down your portfolio, for example, by withdrawing a fixed dollar amount from a stock market indexed fund in retirement. Give an example. Explain how dollar cost averaging affects your returns when accumulating assets, as in saving a regular dollar amount and investing in a stock market indexed fund before retirement. Give an example. If the rate of return on U.S. small cap stocks averages 12.5%, and inflation averages 2.5%, how long will it take for you to double the amount of an investment? (Show all work.)
b) Starting with nothing, how much would you need to save and invest at the beginning of each weak in a U.S. equity mutual fund (say based on the S&P 500, that averages 10% per year and has a standard deviation of 20% per year over long periods of time), to have a portfolio worth $1,000,000 in 20 years? State all assumptions and show your work.
2.(10 points) Brandy and Sherry have been colleagues for many years.Brandy invested $10,000 in their joint business, and Sherry invested $15,000.Their firm, BS, distills liquor.BS has $25,000 in debt.One day, their employee Guiness drinks all of the stock, and takes all of BS's cash, software, and other assets, to flee to Cuba where there is no extradition treaty.Guiness was last seen boarding a plane in Canada using a one-way ticket bound for Havana.If BS were to go bankrupt as a result, what would happen to Sherry (in terms of her (1) equity and (2) debt) had the firm been structured as:
a.a limited liability company;
b.a general partnership; or
c.a corporation.