1. Before investing any money, what five things should Marcelino do first?
2. Is Marcelino's strategy of investing in an oil exploration stock to make quick profits investing or speculating? Support your answer.
3. Luc started talking to Marcelino about market efficiency and market timing. Based on what you now know, how likely is it that Marcelino can pick a stock that will "beat the market?"
4. Calculate Marcelino's average annual rate of return if he purchases shares in an Internet stock at $25 per share, holds the shares for 3 years, and sells them for $65. What is his after-tax rate of return if he is in the 25 percent marginal tax bracket?
5. What potentially significant disadvantage does Marcelino face if he sells his stock for $65 per share after only 10 months and incurs a short-term capital gain?
6. What other financial risks does Marcelino face if he invests in an exploration stock?
7. By investing in two unrelated domestic stocks rather than in just one stock, would Marcelino increase or decrease his systematic risk exposure? What about his unsystematic risk exposure?
8. Luc has urged Marcelino to invest for the long term using a diversified approach. Marcelino is skeptical. Explain why Luc is probably correct.
Last year Marcelino graduated from high school and received several thousand dollars from an uncle as a graduation gift. Marcelino, now in his first year of college, just heard of a guy in his dorm that invested in an oil exploration company and made a huge profit in a few months. Marcelino likes the idea of making some money fast and is considering investing his graduation gift money in a similar stock. Marcelino's roommate, Luc, just finished a personal finance course and is concerned that Marcelino may be getting himself into trouble. Luc knows that Marcelino likes to shop online, has run up a fairly large credit card bill, and has trouble balancing his budget on a monthly basis. In addition, Marcelino really doesn't know much about investing or how people actually "make money investing." Luc has asked you to help him work through the following questions so that he can talk to Marcelino about his investment plans.