Laticia is twenty-two years old and she has all of her savings in a Certificate of Deposit at the bank that currently pays an annual 3 percent yield. The account is protected by the FDIC so it is virtually risk free. She hopes to use her savings for a down payment on a new house in ten years. Inflation in house prices in her area has averaged 5 percent per year. What financial principle from Chapter One does she need to pay better attention to?

Question

Quizplus · Accepted Answer

Laticia needs to pay better attention to the financial principle of risk and return going hand in hand. While her CD is virtually risk-free, the yield of 3 percent may not keep up with inflation in house prices, which has averaged 5 percent per year in her area. This means that the purchasing power of her savings may actually decrease over time, making it more difficult to achieve her goal of a down payment on a new house. She may need to consider investing in higher-risk, higher-return investments to keep up with inflation.

Laticia Is Twenty-Two Years Old and She Has All of Her