Reference no: EM132418028

One of your friends, Friend Friendyface, recently inherited a large sum of money and does not know what to do with it. They are considering investing, but they claim the capital markets are "big and scary and confusing," so they are avoiding making any investments.

Upon learning you are taking a Finance and Accounting course, they seek your advice on investments they could potentially make. 

There are no taxes in this world.

Question 1:

Your friend really likes professional wrestling, and noticed the price of WWE stock has increased a lot in the past year. They ask, "What if I just put all of my money into WWE? They seem to really know what they are doing!" Is this a good idea, based upon our conversations in class? Why or why not? What would you recommend to your friend doing (either investing in WWE, or an investing alternative)? Four or fewer clear and thoughtful sentences should suffice. 

Question 2:

Your friend is also familiar with Ford stock, and thinks they should not own any of it. "Look, I put this table together to compare Ford to WWE. Ford has a lower average return, and more risk! Why does anyone buy Ford at all!?"

Stock Average Annual Return Average Annual Standard Deviation

WWE 12.3% 21.3%

Ford 7.3% 28.5%

Is your friend correct that a stock with a higher standard deviation should necessarily have a higher expected return? Why or why not? Four or fewer clear and thoughtful sentences should suffice. 

Question 3:

Your friend also inherited 100 shares of Wells Fargo stock. When they inherited the shares, they were worth $62.55 per share, but are now worth $47.48 per share. Your friend wants to "wait until the shares get back up to at least $62.55" per share before selling them. What do you think about this strategy? In expectation, will your friend be better off by waiting to sell until the stock is worth at least $62.55 per share?   Four or fewer clear and thoughtful sentences should suffice.