Answer :
Let's analyze the given investments and outcomes for both Gale and Alex to understand the advice that Gale might give to Alex.
### Gale’s Investments:
- Savings account: \[tex]$200 with a 1% return - Return: \( \$[/tex]200 \times 0.01 = \[tex]$2 \) - Mutual fund: \$[/tex]600 with a 7% return
- Return: [tex]\( \$600 \times 0.07 = \$42 \)[/tex]
- Stock: \[tex]$200 with a -10% return (negative return means a loss) - Return: \( \$[/tex]200 \times -0.10 = -\[tex]$20 \) Sum of returns: - Total return: \( \$[/tex]2 + \[tex]$42 - \$[/tex]20 = \[tex]$24 \) - Initial investment: \( \$[/tex]1,000 \)
- Total money after one year: [tex]\( \$1,000 + \$24 = \$1,024 \)[/tex]
### Alex’s Investments:
- Stock: \[tex]$1,000 with a -10% return - Return: \( \$[/tex]1,000 \times -0.10 = -\[tex]$100 \) - Total money after one year: \( \$[/tex]1,000 - \[tex]$100 = \$[/tex]900 \)
### Conclusion:
From the analysis, we can see:
- Gale diversified his investments across a savings account, a mutual fund, and stocks.
- The overall portfolio of Gale yielded a positive return of \[tex]$24. - Alex invested all his money in stocks and faced a loss of \$[/tex]100 due to a -10% return.
Given this information, the most prudent investment advice Gale would likely give to Alex is:
- "Spread your investments in several different areas."
This advice stems from the observed benefit Gale experienced by diversifying his investments, which helped mitigate the risk associated with the negative return on stocks. By spreading investments, the potential impact of a poor-performing asset is reduced, which leads to more stable and potentially positive outcomes.
### Gale’s Investments:
- Savings account: \[tex]$200 with a 1% return - Return: \( \$[/tex]200 \times 0.01 = \[tex]$2 \) - Mutual fund: \$[/tex]600 with a 7% return
- Return: [tex]\( \$600 \times 0.07 = \$42 \)[/tex]
- Stock: \[tex]$200 with a -10% return (negative return means a loss) - Return: \( \$[/tex]200 \times -0.10 = -\[tex]$20 \) Sum of returns: - Total return: \( \$[/tex]2 + \[tex]$42 - \$[/tex]20 = \[tex]$24 \) - Initial investment: \( \$[/tex]1,000 \)
- Total money after one year: [tex]\( \$1,000 + \$24 = \$1,024 \)[/tex]
### Alex’s Investments:
- Stock: \[tex]$1,000 with a -10% return - Return: \( \$[/tex]1,000 \times -0.10 = -\[tex]$100 \) - Total money after one year: \( \$[/tex]1,000 - \[tex]$100 = \$[/tex]900 \)
### Conclusion:
From the analysis, we can see:
- Gale diversified his investments across a savings account, a mutual fund, and stocks.
- The overall portfolio of Gale yielded a positive return of \[tex]$24. - Alex invested all his money in stocks and faced a loss of \$[/tex]100 due to a -10% return.
Given this information, the most prudent investment advice Gale would likely give to Alex is:
- "Spread your investments in several different areas."
This advice stems from the observed benefit Gale experienced by diversifying his investments, which helped mitigate the risk associated with the negative return on stocks. By spreading investments, the potential impact of a poor-performing asset is reduced, which leads to more stable and potentially positive outcomes.
