Worksheet B-Choose Stocks
Although purchasing stock in a corporation always involves some risk, there are many stocks to
choose from. Stocks are often classified into categories according to the trade-offs between risk and
return they offer. The kind of stocks that people should purchase depends on their personal and
financial situations. Stocks that involve little risk are more appropriate for people who have relatively
low incomes or greater financial responsibilities. Consider each of the stock choices below. Create a
portfolio for Romero and Anya, who both work. They earn $65,000 a year, have two children, own a
small house, and want to create a college fund for their children. What part of their remaining savings
should be invested in each of the alternatives after they set aside six months of income in cash in one
or more bank accounts?
A. Blue chip stocks are large, well-established corporations that have histories of steady sales,
profits, and dividend payments. They involve relatively low risks.
percent of their remaining savings in this type of
B.
Romero and Anya should invest
stock because
Growth stocks are usually new firms that produce new types of goods or services. They do
not have a long history of steady sales, profits, or dividend payments. They do offer the
possibility of rapid growth in sales and profitability if their new products are successful. They
involve relatively high risks.
Romero and Anya should invest
stock because
C. Combination growth and return stocks are large, well-established firms that have histories
of steady sales and profits but also are moving into new types of production that offer the
possibility of rapid growth in the future. They involve moderate risks.
percent of their remaining savings in this type of
Romero and Anya should invest
stock because
percent of their remaining savings in this type of
D. Foreign stocks are firms located in foreign nations. The returns on these stocks are affected
by both the success of the firms and the exchange rate for the currency of the nation where the
firm is located. If the value of the Japanese yen grows, for example, the value of Japanese
stocks will also increase in terms of U.S. dollars. This type of stock often involves high risks.
percent of their remaining savings in this type of
Romero and Anya should invest
stock because