Return objective

S

saurya_s

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Can somebody explain this:
Which of the following return objectives is most likely the primary objective given a 70 year-old widow who owns a portfolio comprised of 100 percent Treasury bonds?
A) Capital appreciation.
B) Current income.
C) Total return.
D) Capital preservation.
 
B - She will use the T-Bond interest payments as income.
 
Yes, it would be in the portfolio managment secion.
 
B.. obviously! She will live off the coupon payments
She needs income to live on as presumably she is no longer working.
It cant be A, you want to kill your levels when your old because of a short time horizon and such
it cant be C, for the same reasons as it cant be A
It cant be D, what is she perserving capital for… I dont think they take dollars in the afterlife.
GenY
 
Well, the answer is D as per Schweser. I picked up B as well. Can anyone convince me why it could be D.
 
If you’re looking for current income, wouldn’t you go for corporate bonds? Even if you’re afraid of the default risk, you could still earn more with high grade corporates than T bonds. If she’s wealthy enough to be 100% in T bonds and still be able to have enough income to live, she’s probably looking to keep the money safe until she dies and can pass it off to her grandchildren.
 
I’d say its D because:
Income would be lower with treasury bonds than corporate bonds
treasury bonds are generally more safe than corporate bonds;
so because she chose the safer of the two, its capital preservation
it would be answer b if she were in corporate bonds or dividend yielding stocks over treasuries
In response to Gen Y’s answer:
Yours made sense to me, then I realized the flaw. You’re looking at the person (don’t need it in the afterlife) more than you’re looking at the choice of security
 
dspapo,
Is that your natural thought or you are trying to convince me of D.
If she has to preserve capital, then she should buy TIPS. T bond will indeed preserve capital and it will incorporate expected inflation.
S
 
I guess I was assuming her financial advisor was basing these selections off a determined risk profile….. what 71 year olds primary investing objective is capital preservation?
oh well, this is just further emotional/mental preperation for when I fail level I.
GenY
 
Not sure whether this is correct, but the way I see it you can think of it in terms of investments.
When your old, you don’t invest in risky assets. You invest in the above. The above is probably not going to generate much of an income if any due to inflation. So you are essentially just preserving your asset value from year to year.
 
Schweser explanation: Well never came intuitively to me-
Owning mainly fixed-income securities would generally rule out capital appreciation and total return as appropriate return objectives. The fact that these are Treasury bonds suggests that capital preservation is a higher priority than current income.
geny- well if she had current income as objective- won’t stock on mature company (utilities etc) would be right for her?
S
 
if her objective was current income, she would’ve invested in high yield bonds. investing in treasuries is more indicative of capital preservation.
 
it think it is D because:
1) Capital appreciation: Expected return is greater than the inflation rate, comparatively high risk (good for young people) and funds are invested for long-term.
2) Current Income: Funds are needed to supplement other source of income to meet living needs or other planned expenses.
3) total return: falls somewhere between (1) and (2)
4) Captial preservation: Exprected return is equal to the inflation rate and no chance of loss. Funds are needed in short-term.
In the case of 70 year old widow her chance of lossing money is zero. As in the case of Current income required return is slightly more than the inflation rate and there is some risk to capital invested.
So I think the right answers is D.
 
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