Problem 43 If an investor sees that the ret... [FREE SOLUTION]

Chapter 8: Problem 43

If an investor sees that the return from dividends for a stock is lower than the return for a no-risk bank account, should the stock be sold and the money placed in the bank account? Explain your answer.

Short Answer

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Whether one should sell the stock and place money in the bank account is dependent upon individual circumstances, including risk tolerance and financial goals. It can't be determined solely based on comparing the dividend return and bank account return. Several other factors such as future growth potential of the stock, market condition, investment time frame etc, need to be considered.

Step by step solution

Defining Terminology

Firstly, it is important to understand the two types of investments being discussed here. Return from dividends refers to the profit made from an investment in stocks, specifically the part of the company's profits that is distributed to shareholders. On the other hand, the returns from a no-risk bank account refer to the interest earned from placing money in such an account.

Analyzing Risk and Return

Next, the two types of returns should be compared. If the return from dividends is lower than the return from the no-risk bank account, on the surface it appears that it may be more profitable to invest in the bank account. However, this decision shouldn't be made solely on the basis of return.

Considering Other Factors

Apart from the return, other factors such as risk tolerance, investment goals, and market conditions should be considered before making this decision. Stocks are inherently more risky but have the potential for higher returns through capital appreciation, whereas bank accounts are safer but offer lower returns.

Making a Decision

Finally, based on all these factors, a decision can be made. If the risk tolerance of the individual allows for it and they believe in the potential capital appreciation of the stock despite the lower dividends, they may choose to keep it. Otherwise, if they prefer a safer, steady return and aren't as concerned about capital appreciation, they may choose to sell the stock and place their money in the bank account.

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91影视

If an investor sees that the return from dividends for a stock is lower than the return for a no-risk bank account, should the stock be sold and the money placed in the bank account? Explain your answer.

Short Answer

Step by step solution

Defining Terminology

Analyzing Risk and Return

Considering Other Factors

Making a Decision

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