QUESTION 1

Your friend told you that he has won a lottery of AED 10 million and he wants to invest this money. He heard about three investment options. Bonds, Preferred Stocks, and Common equity. However, he does not completely understand the risk and expected return characteristics of these three investments. Please explain in the space provided below, how will you advise your friend on the differences in the risk and expected return characteristics of these three investment options i.e.Bonds, Preferred Stocks, and Common equity. Furthermore, explain to him the relationship of risk and return with the price he should pay today for each of these securities.