Within the investment portfolio, the allocation of money for shares will be invested in about 20 stocks such that the portfolio is well diversified. Marion is considering two stocks as described below.

Red Limited

- share price AUD13.75

- projected earnings per share AUD1.50

- projected dividend per share nil

- average price earnings ratio for similar companies 10.5 to 1

Blue Limited

- share price AUD8.00

- projected earnings per share AUD0.90

- projected dividend per share AUD0.60

- average price earnings ratio for similar companies 9.5 to 1

Red is regarded by analysts as a growth stock. Blue is regarded by analysts as an income stock.

Marion has requested your advice on whether or not to invest in Red and/or Blue. She is prepared to invest up to a total of AUD10,000.

The investment could be in Red (only) or in Blue (only) or in Red and Blue (in any proportion provided the total equals AUD10,000). Or, of course, no investment in either of these two companies is possible.

Discuss the key differences generally between a growth stock and an income stock. In your response make sure you address the different types of returns from stocks. (3 marks)

Appraise Red and Blue and make a recommendation. In your response make sure you clearly set out your reasons. (4 marks)