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You work as a personal financial adviser in a small town in Nova Scotia. Today you have an initial meeting with your new clients: the family of...
You work as a personal financial adviser in a small town in Nova Scotia. Today you have an initial meeting with your new clients: the family of Pamela, 40 years old, and Isaac, 45 years old. They present you with the following information:
· Financial data:
o Monthly Income: $6,800
o Living Expenses: $4,900
o Assets: $235,000
o Liabilities: $52,000
o Emergency fund: $7,000
· Financial Goals:
Evaluate current financial conditions
Build an investment portfolio that considers various risk factors
With approximately 20 years to retirement, Pamela and Isaac McDonald want to establish a more aggressive investment program to accumulate for their long-term financial needs. Isaac has a retirement program at work. This money, about $75,000, is invested in various conservative mutual funds and government bonds according to the fund's policy (Isaac chooses to keep it in a conservative investment portfolio to make sure he does not lose all of this fund). At home, they are having another investment fund between them, which is worth $25,000, currently buying GICs and put in various bank deposits.
In addition to their investment program, the McDonalds have accumulated $12,000 to help pay for children's education. They have two daughters, aged 7 and 10. And they have $7,000 tucked away in a savings account that serves as the family's emergency fund. Finally, both will qualify for the Canadian Pension Plan when they reach retirement age.
Questions:
1. Evaluate the current financial position of McDonald's family at this stage in their life. What investment goals would be most appropriate for this middle - aged couple? What level of risk should they take? (6 marks)
2. Pamela and Isaac have spent time to study the investment market recently. In specific, they are interested in the following securities: Loblaw Companies Limited (L.TO) and Bank of Montreal (BMO.TO) stock; 3-year Canadian government bond, and two mutual funds recommended to them by their bankers: the BMO Canadian Stock Selection Fund Series A (fund code GGF70739) and the RBC Select Balanced Portfolio - Series A (fund code RBF460) mutual fund.
At their requests, you are required to perform the following tasks:
a. Plot the daily return of Loblaw Companies Ltd (L.TO) stock, return of Bank of Montreal (BMO.TO) and the return of the S&P/TSX Composite Index for the period from Jan 1st2016 to Jan 1st2019 on the same graph. Explain the graph to the McDonald, compare L.TO return to BMO.TO return, and compare them to market's return and explain the risk involved. Which stock is considered riskier and why? (9 marks)
b. Plot the monthly bond yield of the 3-year Canadian government bond from January 2014 to December 2018. Comment on the bond's risk and return and compare this investment with stock market investment in part (a). (6 marks)
c. Pamela and Isaac would like to choose one mutual fund out of the two they list out. They are not sure how to compare them. You are required to compare and give brief explanation to them about the funds (fee, return, risk, asset mix, top 10 investments, etc.). What is one advantage of investing in mutual fund compared to investing in a single stock or bond? Do you think these are good mutual funds to invest giving their objectives? What is the difference between the two funds? Which one should they choose, if any? (9 marks)
3. After analyzing the McDonald's financial situation, their investment goals and the securities they are interested in, you are asked to give them advice on what course of action they should take regarding their investment portfolio. Explain your rationale. (6 marks)
4. Besides the investment portfolio advice on question 3, what are some additionaladvice on other aspects of personal financial planning that you can give to this couple? (4 marks)
Note: You can make further assumptions, but you need to state them out.
