FPC008: Investment Advice Assessment Answer

(a) Balance Sheet:

ASSETS

Cash and bank deposits: $100,000

Superannuation:

Rodney's AMP Super: $250,000

Sarah's HESTA Super: $200,000 Personal assets:

Home: $1,000,000

Contents: $90,000

Rodney's car: $50,000

Sarah's car: $45,000

TOTAL ASSETS: $1,735,000

 LIABILITIES

Mortgage: $750,000

NET WORTH: $985,000

(b) Cashflow Statement:

INCOME:

Rodney's salary (after SG): $140,000

Sarah's salary (after SG): $35,000

TOTAL INCOME: $175,000

 EXPENSES:

Mortgage repayments: $52,200

Living expenses: $80,000

TOTAL EXPENSES: $132,200

 NET CASH INFLOW: $42,800

(c) Planning issues:

Customers who are interested in decreasing their monthly mortgage interest payment have a variety of options available to them. The loan has the potential to undergo refinancing or the possibility of negotiating the interest rate with the existing lender. By engaging in this practice, individuals have the potential to decrease their interest payments and achieve a state of financial autonomy. If enterprises persist in this manner, they might have enduring financial benefits.

Question 2

Analysis of the risks faced by investors is among the most essential components of private wealth management. It is essential to have a solid understanding of an investor's objectives, timeline, liquidity requirements, and level of comfort with risk before one can effectively provide investment recommendations or devise effective long-term investing strategies for that individual. It is impossible to provide appropriate investment opportunities or to establish effective plans for long-term investments in the absence of this essential information. Also, if an adviser does not know how much risk an investor is prepared to accept, it is possible that the investor will purchase financial goods that are more concerned with the advisor's peace of mind than with the investor's personal well-being However, regulatory agencies demand that investment businesses create risk profiles of individual investors before they are allowed to make recommendations regarding financial products or investments to those individuals. The fact that the existing "caveat emptor" rule has historically been detrimental to the success of a great deal of companies is the primary explanation for this phenomenon. The establishment of a framework that provides investors with fundamental safeguards should be the primary objective of any regulatory effort. The fact that the guidelines that are now in place aren't always clear regarding the various components that go into developing a risk profile demonstrates how intricate the process of risk profiling is. At this time, legal counsel can differ significantly from one nation to the next.

As Brett is currently in a phase in which they are creating a considerable quantity of money, now is the time to examine the implementation of a retirement planning strategy. This is done to ensure that the consumers will have appropriate financial resources throughout their retirement years. It is in everyone's best interest to take advantage of the current advantageous circumstances, especially given the prosperous times that customers are currently experiencing.

Customers must pay close attention to cash flow management if they are to avoid frivolous spending and ensure that they will be able to meet their financial goals. It is probable that in order to address this problem in an appropriate manner, you will need to build a savings strategy or create a financial plan for yourself. This will be determined by the facts of the case.

Question 3

A forecast to help illustrate this is as follows:

Year Income Year Balance

0 $ 65,000 $850,000

1 $ 66,950 $802,061

2 $ 68,945 $740,139

3 $ 71,010 $672,137

4 $ 73,149 $597,864

5 $ 75,364 $516,152

6 $ 77,656 $426,773

7 $ 80,022 $328,683

8 $ 82,468 $222,729

9 $ 84,990 $108,741

10 $ 87,591 $-5,148

To put it simply, it's quite unlikely that Alfonse and Alice's retirement savings would be enough to support them if they stopped working right now and lived for as long as they're projected to live. Under these conditions, we estimate that the retirement funds will provide an annual income of $65,000, increasing by 3% each year to account for inflation. They hypothesize that if the fund is set up sensibly and the income is adjusted to accommodate their projected life expectancies, their retirement accounts and other investment resources will be depleted by the end of their respective life expectancies.

Question 4

Answer A

Argo:

Stock Return = 6.0%

Stock Weight = $10,000 / Total Portfolio Value

BHP:

Stock Return = 11.0%

Stock Weight = $7,000 / Total Portfolio Value

Woolworths:

Stock Return = 4.0%

Stock Weight = $9,000 / Total Portfolio Value

Wesfarmers:

Stock Return = 5.0%

Stock Weight = $6,000 / Total Portfolio Value

CBA:

Stock Return = 4.5%

Stock Weight = $8,000 / Total Portfolio Value

Total Portfolio Value = $10,000 + $7,000 + $9,000 + $6,000 + $8,0

Expected Return = (6.0% × Argo Weight) + (11.0% × BHP Weight) + (4.0% × Woolworths Weight) + (5.0% × Wesfarmers Weight) + (4.5% × CBA Weight)

Answer B

Month | Portfolio Return | Benchmark Return | Difference

1 | 5% | 1% | 4%

2 | 2% | 2% | 0%

3 | -7% | -1% | -6%

4 | 3% | -1% | 4%

5 | -1% | 3% | -4%

6 | 4% | 1% | 3%

7 | 7% | 2% | 5%

8 | 8% | 3% | 5%

9 | 1% | -3% | 4%

10 | 2% | -4% | 6%

11 | 8% | 3% | 5%

12 | -2% | 3% | -5%

Answer C

Beta = (Argo Beta × Argo Weight) + (BHP Beta × BHP Weight) + (Woolworths Beta × Woolworths Weight) + (Wesfarmers Beta × Wesfarmers Weight) + (CBA Beta × CBA Weight)

Argo Beta = 1.2

BHP Beta = 0.9

Woolworths Beta = 0.8

Wesfarmers Beta = 1.1

CBA Beta = 0.7

Answer D

In order to ascertain the nature of the returns generated by Jason's managed fund, it is imperative to obtain further information. This includes the fund's alpha and beta values, as well as pertinent details regarding its investing strategy and benchmark.

References

Chang, K. H., & Young, M. N. (2019). Behavioral stock portfolio optimization considering holding periods of B-stocks with short-selling. Computers & Operations Research, 112, 104773.

Zhang, H., Jiang, Z., & Su, J. (2021, March). A deep deterministic policy gradient-based strategy for stocks portfolio management. In 2021 IEEE 6th International Conference on Big Data Analytics (ICBDA) (pp. 230-238). IEEE.

Thakur, G. S. M., Bhattacharyya, R., & Sarkar, S. (2022). Fuzzy Expert System for Stock Portfolio Selection: An Application to Bombay Stock Exchange. arXiv preprint arXiv:2204.13385.

Panos, G. A., & Wilson, J. O. (2020). Financial literacy and responsible finance in the FinTech era: capabilities and challenges. The European Journal of Finance, 26(4-5), 297-301.

Hoechle, D., Ruenzi, S., Schaub, N., & Schmid, M. (2022). Financial advice and retirement savings. Available at SSRN 4339769.
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