Question

For exercise 13 and 14, use the following information.

Della has $1000 that she wants to invest in the stock market. She is considering buying stock in either Company 1 or Company 2. The values of the stocks at the ends of the last four months are shown in the tables below:

14. Do you think investment decisions should be based on this type of reasoning? If not, what other factors should be considered?

Short answer

No, past performance is no guarantee of future performance of a stock. Other factors that should be considered is companies earning data and how much debt they have.

Step-by-step solution

Step-1 – Prediction equation for company 1 and 2.

Prediction equation for company 1 is $y=-1.63+27.45$

Prediction equation for company 1 is $y=0.38x+31.3$

Step-2 – Investment decisions.

The investment decisions should not be taken on the basis of past performance because past performance is no guarantee of future performance of a stock

Step-3 – Determine other factors.

Other factors that should be considered include the companies earning data and how much debt they have.