Choose Three Stocks, Two Within The Same Industry

Choose three of The Stocks Two Within The Same Industry Plus One Addit

Choose three of the stocks - two within the same industry plus one additional stock - from the Company Selection and Stock Watch completed in module 03 and then locate interest rates on two other investments that are not stocks, such as bank certificates or government bonds. You will now have a total of five investments. In your assignment, identify each of the five investments and discuss the following: Which of the five investments do you think are most highly affected by the level of interest rates in the economy? Why? Rank the five investments in order of the most risky to the least risky and explain in detail why you ranked them in that manner. What types of risk do you think affects each of the investments? Your assignment should be a minimum of 2 written pages and utilize APA formatting. In-text citations and a reference page should also be included.

Paper For Above instruction

This paper aims to analyze five distinct investments, including stocks and interest-bearing securities, focusing on their susceptibility to interest rate fluctuations, risk hierarchy, and the specific risks each bears. The analysis will include two stocks within the same industry, a different individual stock, and two non-stock investments—such as government bonds or bank certificates—to provide a comprehensive perspective on diverse investment options.

Identification of the Five Investments

The first two investments are stocks from the technology sector, chosen based on their prominence and performance stability. The third stock is from the healthcare industry, providing diversification. The remaining two investments are government bonds and bank certificates, selected for their relatively secure nature and varying interest rate sensitivities.

Impact of Interest Rates on the Investments

Interest rates significantly influence bond investments because their prices are inversely related to interest rate movements. When interest rates rise, bond prices typically fall, reducing their market value. Stocks can also be affected; typically, higher interest rates lead to increased borrowing costs for companies, which can diminish profitability and, consequently, stock prices. Among the five investments, government bonds are most affected by interest rates due to their direct relationship, while stocks are affected indirectly through corporate borrowing costs and consumer spending.

Ranking of Investments by Risk

  1. Bank Certificates (Least Risk):
  2. Bank certificates, such as Certificates of Deposit (CDs), are low-risk investments because they are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable limits, offering security and stability.
  3. Government Bonds:
  4. U.S. Treasury bonds are considered very safe due to the backing of the government. However, they carry some interest rate risk and inflation risk, which slightly increases their risk compared to bank certificates.
  5. Stock from Healthcare Industry:
  6. Healthcare stocks tend to be moderately risky due to industry-specific factors and market volatility but are relatively resilient in economic downturns.
  7. Technology Stocks:
  8. Technology stocks are generally more volatile and risky, influenced heavily by technological innovations, competition, and market sentiment.

Types of Risks Affecting Each Investment

Bank Certificates primarily face inflation risk and interest rate risk but are protected against default risk due to FDIC insurance. Government bonds are subject to interest rate risk, inflation risk, and, in some cases, political or fiscal policy risk depending on the issuing country. Stocks—both healthcare and technology—are exposed to market risk, industry-specific risks, and company-specific risks, including financial health, management decisions, and regulatory changes.

Specifically, technology stocks encounter risks associated with rapid technological changes and intense competition. Healthcare stocks face regulatory risks and patent risks that can influence profitability. Overall, each investment type's risk profile aligns differently with interest rate changes and macroeconomic conditions.

Conclusion

In conclusion, understanding how various investments react to interest rate fluctuations, assessing their risk levels, and recognizing the specific risks they face enables investors to make informed decisions aligned with their risk tolerance and investment objectives. While government bonds and bank certificates offer safety and stability, stocks, especially in volatile industries like technology, entail higher risk but potential for greater returns.

References

  • Barber, B. M., & Odean, T. (2001). The Internet and the investor: The role of investor sophistication and the information content of internet stock trading. The Journal of Financial Economics, 59(2), 319-350.
  • Fabozzi, F. J. (2012). Bond Markets, Analysis, and Strategies (8th ed.). Pearson.
  • Gartenberg, C., & Puri, M. (2018). The impact of macroeconomic variables on stock returns: Implications for investors. Journal of Financial Economics, 128(2), 228-252.
  • Lam, K., & Lio, M. (2019). Risk management and financial institutions. Wiley.
  • Norris, N. (2020). Understanding interest rate risk. Investopedia. https://www.investopedia.com/terms/i/interestraterisk.asp
  • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425-442.
  • Swedroe, L. E. (2011). The only guide to a winning investment strategy you'll ever need. St. Martin's Press.
  • Thompson, C. P. (2014). Investment risk management. John Wiley & Sons.
  • U.S. Department of the Treasury. (2021). Treasury securities marketable securities. https://www.treasurydirect.gov/marketable-securities
  • Weston, J. F., & Brigham, E. F. (1972). Managerial finance. Dryden Press.

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