June 30, 2022. Elaine, aged 44, is a Data Specialist. Her husband, Paul, aged 42, is a Production Manager. Annually, Elaine's gross earnings are $122,000 and Paul's gross earns are $94,000. They have three children, Mady, aged 14, Travis, aged 11 and Marc, aged 9. Elaine and Paul give you the following information regarding their current finances: Elaine and Paul Net Worth Statement June 30, 2022 Liquid Assets Current Liabilities Joint Chequing Account 8,852 Joint Savings Account 29,542 Elaine Credit Card, 19.5% Paul Credit Card, 20.97% 5,412 5,458 Paul Vehicle Loan, 4.13% 6,525 Investment Assets Credit Line, 6.25% 31,562 Elaine TFSA 27,856 Paul TFSA 41,525 Long-term Liabilities Elaine RRSP 58,940 Mortgage Ottawa Home 561,200 Paul RRSP 42,596 Elaine DC Plan (Note 1) 139,568 Real Estate Assets Home - Ottawa 1,050,000 Personal Assets Elaine Vehicle Paul Vehicle Total Assets 14,800 21,900 1,435,579 Total Liabilities Net Worth 610,157 825,422 Note 1: The defined contribution plan (DC Plan) is from Elaine's prior place of employment. The funds are for retirement savings. Elaine selects the investments based on the limited fund options within the DC Plan. The before-tax real rate of return for the DC Plan is 3.6% pa. Their TFSAs and RRSPs are invested in the below funds: Fund E(R) before-tax TFSA RRSP Fixed Interest 3.65% 11,285 45,751 Canadian Equities 10.15% 35,854 49,196 International Equities 10.45% 22,242 6,589 Total 69,381 101,536 Page 2 of 6 Elaine and Paul plan to use the funds in their TFSAs for future travel plans and emergency funds. The funds in the RRSPs and DC Plan are their current retirement savings. Elaine and Paul make annual contributions of $5,000 and $7,000 respectively to their RRSP accounts. Their monthly cash flow surplus is $450. One of Elaine and Paul's financial savings goals is to have $900,000 (before-tax dollars) saved for retirement when Paul turns 65. Elaine and Paul provide the following information regarding their group insurance coverage: Life Insurance o Elaine, 2 x base salary to a maximum of $225,000. Beneficiary, Paul. o Paul, 1 x base salary. Beneficiary, Paul's Mom. Disability Insurance o Elaine, coverage for 70% of gross income, to a maximum of $7,000 a month. The coverage has a 180-day elimination period and covers any occupation definition. Extended Health Coverage Comprehensive, covers prescription drugs, paramedical. $100 per person annual deductible, no maximum, coinsurance 80%. Dental: Comprehensive, $25 deductible per claim. Vision: Covered with an annual maximum of $500 per claimant. In addition to the coverage listed above, Elaine and Paul tell you that they have a joint- first to die, term life insurance policy with a face value of $250,000 and three years until maturity. Elaine and Paul recently had their home and auto insurance coverage reviewed and implemented all the recommended changes to ensure adequate coverage. Assumptions: Tax rates: Taxpayer Elaine Paul Average Tax Rate (Federal and Provincial) 26.63% Marginal Tax (Federal and Provincial) 43.41% 22.08% 33.89% Inflation 3%. Page 3 of 6 RISK PROFILE QUESTIONNAIRE Elaine and Paul - Completed together 1) In how many years do you plan to use your investment? (a) Parking (Less than a year) (b) Short Term (1-2 years) (c) Medium Term (2-5 years) (d) Long term (5-7 years) 2) Inflation erodes the value of your savings. Growth investing can counter the eroding effect on inflation but also expose you to the risk of short-term losses. (a) Inflation may erode my savings but I have no tolerance for loss (b) I am conscious of the risk inflation presents, but would prefer a middle ground that limits losses (c) I am comfortable with this trade off to beat inflation 3) How familiar are you with investment markets? (a) Very little understanding or interest (b) Not very familiar (c) Understand that markets fluctuate and that different market sectors offer different income, growth and taxation characteristics 4) What is the most aggressive investment you have made or likely to make? (a) Cash management trust (b) Own home (c) Mutual funds (d) Shares, technology fund, smaller companies fund 5) What would your reaction be, if six months after placing your investment you discover that, in line with what is happening in the financial markets generally, your portfolio has decreased in value by 20%? (a) Horror, security of your capital is critical and you did not intend to take risks (b) You would cut your losses and transfer your funds into more secure investment sectors (c) You would be concerned, but would wait to see if the investments improve (d) This was a calculated risk and you would leave the investments in place, expecting future growth Page 4 of 6 6) Income Requirements: (a) Maximum possible income is required (b) Substantial income is required with some capital growth (c) Income is required however capital growth is equally important (d) A small amount of income is required but mainly capital growth (e) The focus should be on capital growth with income reinvested 7) Liquidity Requirements (a) Easy access to invested funds is required at all times (b) The ability to access the majority of investments at short notice is required (c) A reasonable level of invested funds should be accessible at short notice (d) Only a small proportion of invested funds needs to be readily accessible (e) There is no need to maintain easy access to invested fund 8) To what extent are you concerned about preservation of your capital? (a) Security of capital is required regardless of potential returns (b) A small degree of risk would be acceptable for a slight increase in potential returns (c) A moderate degree of risk would be acceptable given the potential for increased returns (d) Volatility in investment values is acceptable given longer term capital growth objectives (e) Maximizing potential returns is preferred regardless of risk Investor Type Profile Defensive You are a Defensive investor. Risk must be very low and you are prepared to accept lower returns to protect capital. The negative effects of tax and inflation will not concern you, provided your initial investment is protected. Balanced You are a Balanced investor who wants a balanced Growth portfolio to work towards medium to long term financial goals. You require an investment strategy which will cope with the effects of tax and inflation. Calculated risks will be acceptable to you to achieve good returns. You are Growth investor, probably earning sufficient income to invest most funds for capital growth. Prepared to accept higher volatility and moderate risks, your primary concern is to accumulate assets over the medium to long term. Your portfolio may include more aggressive investments. Page 5 of 6 Asset Allocation Fixed Interest Canadian Equities International Equities 100% 60% 25% 15% 40% 30% 30% Question 1 (35 marks). Answer the following and show your calculations for full marks: A. Identify four risks that Elaine and Paul are exposed too (think risk management) and explain why they are risks and how the risks you have identified impact their personal finances? You can answer this question without showing calculations. (8 marks) B. Using the income approach, calculate the amount of life insurance should each purchase to protect their family finances? Round up to the nearest $10,000 and assume they will retire when Paul turns 65. Assume payments are at the beginning of the period, use real after-tax interest rate of 2%, and ignore the CPP benefits. (12 marks) C. Are there any issues with their current life insurance coverage? Is there anything they should do, or change, that could protect them? (8 marks) D. Based on your needs analysis, what type of life insurance should they purchase and why? (3 marks) E. Are there any issues with their insurance coverage (ignore life insurance)? Should they consider any other type of insurance? (4 marks) Question 2 (40 marks). Answer the following and show your calculations for full marks: A. What is the real before-tax expected return on Elaine and Paul's TFSA and RRSP portfolio? Comment on the results of the calculated expected returns. (10 marks) B. Review the Risk Profile Questionnaire that Elaine and Paul completed together. Using the questionnaire and the case study information above, determine a risk profile for Elaine and Paul and support your choices in respect to risk tolerance and risk capacity (reference course material). (8 marks) C. Based on the risk profile you created in question 2B, compile an asset allocation for Elaine and Paul using the three funds mentioned in the case study. Calculate the real before-tax expected rate of return. Then explain why these are different to your answer in 2A and what this means for the client. (8 marks) D. Using the new portfolio and inflation adjusted return (question 2C) and other retirement savings, calculate whether Elaine and Paul will meet their retirement savings goal. (10 marks) E. Explain to Elaine and Paul the importance and dimensions of diversification. (4 marks) Page 6 of 6