[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

too. When stocks go down, bonds often go up, so some mutual funds invest in both
stocks and bonds. Others invest in risky ventures that, if successful, promise high
returns; these are sometimes referred to as “growth” funds. There are many other
specially designed mutual funds, and together they are enormously popular. For
most investors, the first foray into the bond or stock market is through the purchase
of a mutual fund.
Desirable Attributes of
Investments
Table 39.1 sets forth the various investment opportunities we have described, with
a list of their most important attributes. In surveying the broad range of investment
opportunities available, individuals must balance their personal needs against what
the different investment options have to offer. The ideal investment would have a
high rate of return, be low risk, and be exempt from tax. Unfortunately, as economists
always like to point out, investors face trade-offs. You can only expect to get
more of one desirable property—say a higher expected return—at the expense of
another, such as safety. To understand what is entailed in these trade-offs, we need
to take a closer look at each of the principal attributes of investments.
EXPECTED RETURNS
First on the list of desirable properties are high returns. As we have noted, returns
have two components: the interest (on a bond), dividend payment (on a stock), or rent
(on real estate) and the capital gain. For instance, if you buy some stock for $1,000,
receive $150 in dividends during the year, and at the end of the year sell the stock for
$1,200, your total return is $150 + $200 = $350 (a rate of return of 35 percent). If
you sell the stock for only $900, your total return is $150 − $100 = $50 (a rate of
return of 5 percent). If you sell it for $800, your total return is a negative $50 (a rate
of return of −5 percent).
Internet Connection
INDEX FUNDS
Many mutual funds are designed to follow the return of a
market index, such as the Standard and Poor’s (S&P) 500
index. Standard and Poor’s Web site at www.spglobal.com provides
the latest information on the performance of their indexes.
If you follow the links on the left side of the page, you will find
a primer on the mathematics of calculating market indexes.
870 ∂ CHAPTER 39 A STUDENT’S GUIDE TO INVESTING