Assignment:
Q1. Robert Ford Simpson is a simple man who, at the age of 25, is aware that life requires much planning and wisdom. He currently lives in Australia, but would one day like to retire to a nice beach in Queensland. In Australia, retirement is at the age of 65 for a male. He is relatively well off, working at a major investment bank. Having a thorough knowledge of finance, he understands the importance of saving and the time value of money. To this end, he saves $2,000 per month for the next 10 years.
Financial markets are experiencing a boom of late, due to major government infrastructure projects. It is estimated that during Robert's working life the effective annual rate of return will be 11%. During retirement, the construction boom is expected to slow with effective annual rates declining to 8%.
Robert is very driven, ambitious, and disciplined. He develops many goals in relation to his retirement and investment goals.
Firstly, he reasons that given the cost of living, he will require a retirement income of $15,000 per month for 25 years. The first retirement payment will be received at end of the first month of his retirement.
Secondly, he would like to purchase a small apartment in Port Douglas, in 10 years' time. The current value of an apartment is $200,000. Average values have, over the past 100 years, grown at a rate of 5.5% per annum.
Thirdly, given he does not wish to have children, Robert realises that he might accumulate a substantial amount of wealth without leaving a legacy once he passes away. He would, therefore, like to leave a large inheritance of at least $1,000,000 to his niece, Delores. After the 20th year of his retirement we would like to give the $1,000,000 to his niece.
Answer the following questions. Show all workings.
(a) What is the nominal rate of return associated with the two phases of Robert's life? Assume a monthly frequency. Why do we require the nominal rate of return?
(b) How much will Robert require for his retirement? Combine both the single sum cash flow and multiple cash flow streams in your answer. (hint: consider both spending and inheritance in retirement)
(c) What is the estimated value of the apartment in 10 years' time?
(d) If after 10 years, Robert purchases the property, how much will Robert have left over for his retirement?
(e) Will the remainder be sufficient to cover his retirement requirements calculated in part (b)?
(f) How much will Robert need to boost his monthly savings to? (Hint: Assume house has been purchased, so 10 years have elapsed.)
Q2. You work as a research analyst in the bond research department of a wealth management firm. As an analyst it is your job to analyse interest rates and bond prices. You then make recommendations to the financial planning team on what are the best bonds to buy.
In a bid to diversify its source of funding, one of Australia's largest banks, ANZ, has issued three new bonds. Each has a par value of $500,000. The coupon rate offered on each bond is 6.5% per annum. The bonds mature in 10, 20, and 50 years. The going yield in the market is also 6.5% per annum. Coupons are paid semi-annually.
You a deciding which of the three bonds is best suited for the financial planning team's clients.
(a) Calculate the value at which you can buy the bonds today, given the maturity is:
a. 10 YEARS (Bond A);
b. 20 YEARS (Bond B);
c. 50 YEARS (Bond C).
(b) If, after the bonds are issued, the market yield on all bonds drop to 5% p.a, what will be the new bond prices.
(c) Alternatively, what is the new value of the three bonds if market interest rates rise to 8% p.a.?
(d) Using your answers from parts (a), (b) and (c) fill out the following table:
Table 1: Bond values at varying yields.
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Yields
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Maturity
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5%
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6.5%
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8%
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10 years (Bond A)
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20 years (Bond B)
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50 years (Bond C)
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(e) Based on your observations of Table 1, briefly describe the relationship between maturity and the price of the bond.
(f) As the analyst, you expect that interest rates will fall to 5% per annum. Based on your calculations, which bond would recommend as a purchase? Support your answer by calculating the return on the bond (Hint: (P1/P0) -1 )
Q3. You are the manager of Platinum Managed Funds. Your company offers a number of investment products to suit different investors. A client requests a recommendation on the best suited portfolio for herself. After some analysis you establish that the client is highly risk averse.
The client can choose from amongst the following four portfolios:
Portfolio 1: 50% CBA and 50% RIO
Portfolio 2: 50% CBA and 50% TLS
Portfolio 3: 50% CSL and 50% TLS
Portfolio 4: 50% RIO and 50% TLS
Your task is to answer the following questions by referring to your textbook, other finance books, the media, the internet etc.:
(a) By using the information in TABLE calculate the expected (average) return, denoted by E(R), and the risk (standard deviation), for each of the four assets as well as the four portfolios in Table 2 and include your answers in the table.
(b) Explain the meaning of correlation and how the correlation coefficient impacts the risk of a portfolio. Include in your answer the meaning of the correlation coefficients (+.7062; +.1884; +.3366; and -.2464) given in Table for each of the four portfolios and the effect it has had on the risk. Your answer should not exceed 500 words.
(c) Discuss the meaning of diversification in finance. Discuss the impact that diversification has had on the expected return and risk for the four portfolios in Table. Your answer should not exceed 500 words.
(d) Assuming that an investor is risk averse, which portfolio is preferred. In your answer define what is meant by risk aversion, and any relevant calculations that can be used.Answer should not exceed 300 words
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Table : Stock and Portfolio Returns
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Year
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CBA
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CSL
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RIO
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TLS
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Portfolio 1 (CBA,RIO)
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Portfolio 2 (CBA,TLS)
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Portfolio 3 (CSL,TLS)
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Portfolio 4 (RIO,TLS)
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2001
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0.0931
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0.4032
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0.3025
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-0.174
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0.1978
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-0.0405
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0.1146
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0.0643
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2002
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-0.1536
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-0.3774
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-0.1668
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-0.1206
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-0.1602
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-0.1371
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-0.249
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-0.1437
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2003
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0.2784
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-0.3149
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0.1156
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0.1569
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0.197
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0.2176
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-0.079
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0.1362
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2004
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0.1968
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0.8878
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0.2047
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0.102
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0.2008
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0.1494
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0.4949
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0.1534
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2005
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0.4385
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0.506
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0.7674
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-0.0671
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0.6029
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0.1857
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0.2195
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0.3501
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2006
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0.2054
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0.6416
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0.0103
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0.4737
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0.1078
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0.3395
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0.5576
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0.242
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2007
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0.061
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0.5255
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0.6057
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0.1238
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0.3334
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0.0924
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0.3246
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0.3648
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2008
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-0.4058
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0.1122
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-0.6573
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-0.0447
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-0.5316
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-0.2253
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0.0338
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-0.351
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2009
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1.1626
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-0.1566
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1.0455
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-0.0053
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1.1041
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0.5787
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-0.081
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0.5201
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2010
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0.0693
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0.2193
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0.236
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-0.0402
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0.1526
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0.0145
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0.0896
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0.0979
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2011
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0.0596
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-0.1431
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-0.1772
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0.3643
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-0.0588
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0.212
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0.1106
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0.0936
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2012
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0.3934
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0.7918
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-0.0405
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0.5468
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0.1765
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0.4701
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0.6693
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0.2531
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2013
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0.2424
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0.2972
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-0.0108
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0.2155
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0.1158
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0.2289
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0.2564
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0.1023
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2014
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0.2964
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0.2734
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-0.1231
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0.3676
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0.0867
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0.332
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0.3205
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0.1222
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2015
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-0.0497
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0.2041
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-0.3202
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-0.0697
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-0.1849
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-0.0597
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0.0672
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-0.1949
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2016
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0.1261
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0.0983
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0.7041
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-0.0338
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0.4151
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0.0461
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0.0322
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0.3351
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Expected Return
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Risk
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Correlation coefficient
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0.7062
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0.1884
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0.3366
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-0.2464
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Historical Returns
Provide complete and step by step solution for the question and show calculations and use formulas. Your answer must be in 2500 to 3000 words and typed and in APA format.