Activity 4.8 Dollar Cost Averaging Answer Key
Introduction
Activity 4.8 in finance refers to the concept of dollar cost averaging. It is a strategy used by investors to reduce the impact of market volatility on their investments. In this article, we will provide the answer key to Activity 4.8 Dollar Cost Averaging.
What is Dollar Cost Averaging?
Dollar cost averaging is a strategy where an investor invests a fixed amount of money at regular intervals, regardless of the market conditions. This means that when the market is high, the investor buys fewer shares, and when the market is low, the investor buys more shares. The goal of dollar cost averaging is to reduce the impact of market volatility on the investor's portfolio.
How Does Dollar Cost Averaging Work?
Let's say an investor decides to invest $1,000 in a stock. Instead of investing the entire $1,000 at once, the investor decides to invest $100 every month for 10 months. If the stock price is $10 in the first month, the investor will buy 10 shares. If the stock price is $5 in the second month, the investor will buy 20 shares. By the end of 10 months, the investor will have invested $1,000 and will own a varying number of shares depending on the stock's price each month.
Advantages of Dollar Cost Averaging
Dollar cost averaging has several advantages:
- Reduces the impact of market volatility on the investor's portfolio
- Eliminates the need to time the market
- Encourages disciplined investing
- Can lead to lower average cost per share
Disadvantages of Dollar Cost Averaging
Dollar cost averaging also has some disadvantages:
- May miss out on gains if the market is consistently rising
- May buy more shares at a higher price if the market is consistently falling
Conclusion
In conclusion, dollar cost averaging is a strategy used by investors to reduce the impact of market volatility on their investments. It has several advantages and disadvantages that investors should consider before implementing the strategy. We hope this answer key to Activity 4.8 Dollar Cost Averaging has provided you with a better understanding of this concept and how it works.