Question

Dollar-cost averaging means that you buy equal dollar amounts of a stock every period, for example, $500 per month. The strategy is based on the idea that when the stock price is low, your fixed monthly purchase will buy more shares, and when the price is high, fewer shares. Averaging over time, you will end up buying more shares when the stock is cheaper and fewer when it is relatively expensive. Therefore, by design, you will exhibit good market timing. Evaluate this strategy.

Solution

Verified
Answered 2 years ago
Answered 2 years ago

Dollar cost averaging is not usually a sound investing strategy in many cases because you cannot predict the future movements of a stock price. When employing this specific method you are assuming the stock price will trade somewhere around a normal range for the duration of your investment time. This strategy doesn't give you the most effective range to determine what a good price is, there could be a month or two of extreme volatility where you can end up buying a lot of shares at extremely high prices. The only way that this strategy can work is on a short timescale of around 6 months in which case it might be possible.

Create an account to view solutions

By signing up, you accept Quizlet's Terms of Service and Privacy Policy
Continue with GoogleContinue with Facebook

Create an account to view solutions

By signing up, you accept Quizlet's Terms of Service and Privacy Policy
Continue with GoogleContinue with Facebook

Recommended textbook solutions

Essentials of Investments 10th Edition by Alan J. Marcus, Alex Kane, Zvi Bodie

Essentials of Investments

10th EditionISBN: 9780077835422Alan J. Marcus, Alex Kane, Zvi Bodie
887 solutions
Principles of Macroeconomics 6th Edition by N. Gregory Mankiw

Principles of Macroeconomics

6th EditionISBN: 9780538453066 (4 more)N. Gregory Mankiw
447 solutions
Principles of Economics 8th Edition by N. Gregory Mankiw

Principles of Economics

8th EditionISBN: 9781305585126 (10 more)N. Gregory Mankiw
1,330 solutions
Cambridge IGCSE Business Studies 4th Edition by Karen Borrington, Peter Stimpson

Cambridge IGCSE Business Studies

4th EditionISBN: 9781444176582Karen Borrington, Peter Stimpson
467 solutions

More related questions

1/4

1/7