Question
a financial advisor and will be asked to provide advice to a client seeking to understand the performance of their investment in equity shares of
a financial advisor and will be asked to provide advice to a client seeking to understand the performance of their investment in equity shares of a company and on his super fund. You will be asked to calculate different types of returns for their investment using the data provided and do certain calculations related their super and advice on whether switching the super fund is advisable.
To support your advise, please provide all the calculations have performed:
Mr Peter Clark has been investing in equity shares of company X since 2018. The share prices and dividends of this company are as follows:
Year | Share price at the beginning of the year ($) | Dividend paid at the end of the year ($) |
2018 | 120 | 3 |
2019 | 122 | 4 |
2020 | 121 | 3 |
2021 | 123 | 2 |
At the beginning of 2018, Peter bought 500 shares of company X. At the beginning of 2019, he sold 200 of these shares. At the beginning of 2020, he bought another 100 shares and sold all the shares at the beginning of 2021.
The expected beta coefficient of company X is 1, the average market return is 3%, and the risk-free rate of return is 1%.
have estimated the single-factor and Fama-French three-factor model for company X and the estimation results are as follows:
Single-factor model | Multi-factor model | |
Intercept | 0.701 (2.01) | 0.850 (0.95) |
Rm-Rf | 1.115 (2.51) | 1.235 (5.50) |
SMB | 0.350 (2.15) | |
HML | 0.492 (2.98) | |
R^2 | 0.51 | 0.71 |
Residual error | 7.07% | 3.51% |
In addition to investing in shares, Mr Clark has been employed since 1 January 2021. From this job, he received an annual salary of $90,000. In addition to his salary, he is reimbursed $80 per month for his phone bill and $150 per month as transport expenses to work. His agreement with his employer allows him to work overtime, and he has received $500 per month since 1 January 2021.
requirments
- Calculate arithmetic, geometric and dollar-weighted returns from Peter's investment and advise Peter if he has earned a return commensurate with risk.
- Comment on the estimates of the single-factor model and multifactor model. Which model is better for estimating the return of company X. Justify answer.
- If the risk premiums of SMB and HML are 2% and 3%, respectively, estimate the expected return of company X.
- Explain how you treat Peter's salary, reimbursement of the mobile bill and his transport allowance by his employer in determining the earnings eligible for super guarantee. Estimate the amount of super in Peter's account as on 31 December 2022.
- Peter is 50 years old and is currently contributing to a defined benefit plan. He is thinking of switching to a defined contribution plan. Advise Peter on the advantages and disadvantages of switching to a defined benefit plan.
CALCULATIONS
Please include calculations in an Excel file along with your explanations and analysis.
Please follow the instructions below to guide your response:
- Support decisions with written explanations and analyses that evidence and justify reasoning.
- Make explicit connection to theories and models relevant to the case study.
- Submit calculations in an excel file along with explanations and analyses.
- Communicate decisions and analyses clearly and in such a way that a lay person can understand them.
- Consider the assessment criteria below for details on how will be assessed. Reference: Bodie, Z, Kane, A & Marcus, A 2019, 'Elements of investments', Essentials of investments, 12th edn, McGraw-Hill Education
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