Answer to 1
The best level of risk tolerance must be betwixt 30-50% because it signifies a conservative approach that is more suitable for investors seeking lesser risk and higher return. Besides, such rate of risk tolerance indicates that one is not ready to take big chances even though it implies that he or she cannot make money out of it. Therefore, being conservative in nature with a risk tolerance rate of 30-50% can assist an investor to utilize ample information about a fund and endeavor to take a slight chance for a better outcome. In contrast to this, the rating that can be provided to an aggressive stock is 10-20% because such stock is highly risky in nature and can provide higher returns to the investors as well (Parrino et. al 42-56). In this case, the investor is ready to find every opportunity that can enhance his or her financial outcome from the fund.
Answer to 2
The mutual funds that are most suited for investing one’s contributions are VWEHX, VUSTX, and VFITX. The percentage amount of contribution that can be attributed to these funds is 40%, 40%, and 20% respectively. The reason behind such investment is that the first two stocks intend to capture consistent income and lessen loss or defaults. Besides, both the funds can neither be regarded as aggressive nor conservative because it is moderate in nature and can provide higher returns even by lesser risk factors. Besides, seeing the performance of these funds, it can be observed that these have reported an upward trend over the years that is a positive sign for investors. In contrast to this, choosing a lesser risky mutual fund like VFITX is also required because it can play a key role in setting off losses if the previous moderate funds fail to deliver optimal performance. As stated in Vanguard such bond is also backed by credit and faith of the US Government, thereby playing a major role in reducing the risk of default for the investors. Therefore, these three mutual funds must be selected for the purpose of investment of contribution.
Answer to 3
The major reason as to why the aforesaid strategy is consistent with the previously mentioned risk tolerance can be attributed to the fact that following a conservative approach is the most desirable for the investors because it has lesser chances of default with good possibilities of higher outcome (Steve et. al 77-81). However, being too much conservative cannot hold good because investors may either have to wait for a good return or they may attain nil outcome from such investment. This is the reason why a level of 30-50% contribution is referred as conservative in nature. As stated by Wagenhofer, investors have to take a higher risk of achieving higher returns but such aggressive approach is not feasible for most of the investors because there are higher chances of default as well. Therefore, choosing a slightly conservative approach would be a better option with a scale of 20-30%, as it is lesser risky and has slighter chances of profitability.
Parrino, Bob., Bates, Tom., and Kidwell, David. Fundamentals of corporate finance. Hoboken, NJ, 2012. Wiley
Steve, Albrecht, W., Stice, Earl.K. and Swain, Monter.R. Financial accounting, Mason, OH: Thomson, 2011. South-Western.
Vanguard. High-Yield Corporate Fund Investor Shares (VWEHX). 8 December. 2017
Wagenhofer, Alfred. The role of revenue recognition in performance reporting. Oxford University Press, 2014