Last year Marcelino graduated from high school and received several thousand dollars from an uncle as a graduation gift. Marcelino, now in his first year of college, just heard of a guy in his dorm that invested in an oil exploration company and made a huge profit in a few months.

Marcelino likes the idea of making some money fast and is considering investing his graduation gift money in a similar stock. Marcelino's roommate, Luc, just finished a personal finance course and is concerned that Marcelino may be getting himself into trouble. Luc knows that Marcelino likes to shop online, has run up a fairly large credit card bill, and has trouble staying within his monthly budget. In addition, Marcelino really doesn't know much about investing or how people actually "make money investing" Luc has asked you to help him work through the following questions so that he can talk to Marcelino about his investment plans.

$1$ Before investing any money, what five things should Marcelino do first?

$2$ Is Marcelino's strategy of investing in an oil exploration stock to make quick profits investing or speculating? Support your answer.

$3$ Luc started talking to Marcelino about market efficiency and market timing. Based on what you now know, how likely is it that Marcelino can pick a stock that will 'beat the market'?

$4$ Calculate Marcelino's average rate of return if he purchases shares in an Internet stock at $$25$ per share, holds the shares for $3$ years, and sells them for $$65.$ What is his after$-$tax rate of return, if he is in the $25\%$ marginal tax bracket?

$5$ What potentially significant disadvantage does Marcelino face if he sells his stock for $$65$ per share after only $10$ months and incurs a short$-$term capital gain?

$6$ What other financial risks does Marcelino face if he invests in a oil exploration stock?

$7$ By investing in two unrelated domestic stocks rather than in just one stock, would Marcelino increase or decrease his systematic risk exposure? What about his unsystematic risk exposure?

$8$ Going with conventional wisdom, Luc has urged Marcelino to invest for the long term using a diversified approach. Marcelino is skeptical. Do you think Luc is correct or not correct? $($The answer to this requires a bit of research about current$-$market trends and what groups of stocks are performing well and which ones are not. This is when in$-$class discussion would come in so handy. If you answer according to the book, you are fine. It's just that there is so much more currently going on that I$\text{'}$m not able to impart in a few short weeks$).$