Tutorial_Questions_Sem_1_2015

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ECONOMICS, FINANCE and MARKETING BAFI 1014 – Personal Wealth Management Tutorial Questions Semester 1 2015 BAFI 1014 – Introduction to Financial Planning 2013 1

Topic 1 – Personal Financial Planning Environment Question 1 Discuss the different financial issues and priorities that are likely to exist between a couple in the mid-thirties with 3 children as compared to a couple in their fifties with no dependent children. Question 2 What impact does the performance of investment markets in the U.S., Europe and Asia have on the Australian financial market? Discuss. Question 3 (a) Explain the 4 phases of the business cycle and how the performance of investment products is likely to be affected by the 4 phases. (b) What phase of the business cycle do you believe we are in now? Explain. Question 4 Explain the major difference between the following:  A licenced Dealer  Authorised representative Question 5 Discuss how a client’s attitude towards risk may affect goal setting and recommendations. Question 6 Given the current state of the economy, and likely future directions, how would you respond to the following 3 situations: (a) Liz aged 32 and single, has just inherited $120,000. She is looking at investing all of the funds into the stockmarket into blue-chip companies but is concerned about the recent stockmarket losses. What would be your advice and what other factors would you need to consider? (b) John aged 42 and married with 3 children, has an investment property worth around $330,000 and a loan currently standing at $200,000. John is starting to become concerned with the prospect of falling property values and is seeking your advice about whether he should sell the property, pay off the loan and invest his money into a conservative managed fund. What factors would you need to consider in your advice to John? (c) Mary comes to you in a distressed state about the negative returns being experienced in her superannuation fund. She is looking to retire in 3 years time and says she cannot afford for her fund balance to deteriorate any further. Should Mary move her superannuation funds away from stocks and into more conservative investments? BAFI 1014 – Introduction to Financial Planning 2013 2

Question 7 Below are details of the Finn family: Assets: Liabilities: Family home $290,000 Credit card debt $2,000 Car 35,000 Mortgage 15,000 Contents 50,000 Bank deposits 45,000 Debentures 75,000 Managed funds - balanced 40,000 Superannuation funds 420,000 Income: Gross salaries of Mr. and Mrs. Finn $50,000 (tax of $14,000) and $20,700 (tax of $3,100) Expenditure: $30,000 per annum - including $10,000 per annum mortgage repayments, and a commitment to repay the credit card debt over the next twelve months. (a) Calculate the following ratios: debt service; savings; liquidity; and solvency. (b) Describe what stage of life you think the Finn family is at and why you think so. (a) Mr and Mrs Finn believe that their risk profile is balanced. Describe what investment characteristics you think a balanced investor may have. BAFI 1014 – Introduction to Financial Planning 2013 3

Topic 2 – Analysing the risk and return from investments Question 1 Which statement is correct? (a) Present value is the amount that must be set aside today in order to have a specified amount in the future. (b) An ordinary annuity has identical payments or receipts each and every period for a specified time frame (c) The more frequently interest is compounded, the larger will be the future value of any deposit (d) All of the above Question 2 Margaret invests $40,000 into a share managed fund that has been paying a semi-annual compound return of 6% p.a. All returns are reinvested. If Margaret invests the funds on 1 July 2013, how much will she have accumulated in the fund by 1 July 2016? (a) $47,641 (b) $43,709 (c) $56,741 (d) $47,762 Question 3 On 31 March 2008, Pat invested $12,000 in a fund paying 8.5% compounded semi-annually. How much will be in the fund on 30 September 2013? How much interest was earned? (a) $18,967.8 & $6,967.8 (b) $18,967.8 & $7,704.2 (c) $16,794.2 & $6,967.8 (d) $19,954.5 & $7,014.8 Question 4 Harry wants to buy a unit in 3 years time and will require a deposit of $40,000. If he is able to earn 4% compounded quarterly, how much will he need to invest now? (a) $35,560 (b) $35,498 (c) $45,073 (d) $42,064 BAFI 1014 – Introduction to Financial Planning 2013 4

Question 5 Eileen, aged 42, has $120,000 invested in her superannuation account. If the overall return on her funds is 4% p.a. compounded semi-annually, how much will she have accumulated at age 56? a) $207,801 b) $158,337 c) $359,844 d) $208,923 Question 6 An executive will retire at age 65 and expects to live to age 75. Assuming a 10% p.a. rate of return, calculate the amount that he must have available at age 65 in order to receive $100,000 annually from retirement to death. (a) $640,950.61 (b) $614,456.71 (c) $635,119.20 (d) $639,446.23 Question 7 You hold an investment in Asset A and estimate the following returns are possible: a 10% chance of returning an 8% return, a 50% chance of returning a 10% return, and a 40% chance of returning a 15% return. Calculate the weighted average expected rate of return. Question 8 Investments with a high standard deviation represent high risk and therefore should be avoided. Discuss. BAFI 1014 – Introduction to Financial Planning 2013 5

Question 9 You are provided with the estimated returns and standard deviations for three companies Estimated return Standard deviation Financial 10% 15% Guinness 12% 7% Hattel 15% 13% Required (i) Calculate the range of returns for each of the 3 companies for both 1 and 2 standard deviations. (ii) Which investment would you recommend for a risk averse investor? Explain. Question 10 If we know that the standard deviation of Castle Ltd is 3% and the expected return is 8.5%, which of the following statements is true? a) Approximately 2/3 of the time, the actual returns for Castle Ltd will lie in the range 8.5% : 11.5% b) Approximately 1/3 of the time, the actual returns for Castle Ltd will lie in the range 5.5% : 11.5% c) Approximately 2/3 of the time, the actual returns for Castle Ltd will lie in the range - 5.5% : 11.5% d) Approximately 2/3 of the time, the actual returns for Castle Ltd will lie in the range 5.5% : 11.5% Question 11 Examine the following table of asset class performance: Asset class Return Risk Shares Property Cash Bonds Inter. Shares Inter. Bonds Shares 17.9% 21.4% 1 Property 14.0% 13.0% .7 1 Cash 11.9% 1.0% 0 0 1 Bonds 15.3% 5.5% .3 .4 0 1 Inter. Shares 19.2% 18.7% .8 .2 .1 0 1 Inter. Bonds 16.0% 14.0% -.4 -.1 0 .8 .1 1 (i) Explain the principle of correlation and how it can be used to select assets within a portfolio. (ii) Which 2 asset classes exhibit the highest correlation and lowest correlation? BAFI 1014 – Introduction to Financial Planning 2013 6

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