Please kindly answer all of them,
Financial Advisor's Case: Retirement Plans and Investment Choices Ken Johnson's 22-year-old daughter Bozena has just accepted a job with Doctor Medical Systems (DMS), a firm specializing in computer services for doctors. DMS offers employees a Traditional 401(k) plan to which employees may contribute 5 percent of their salary. DMS will match $0.50 for every dollar contributed. Bozena's starting salary is $32,000, so she could contribute up to $1,600 and DMS would contribute an additional $800. Contributions to a Traditional 401(k) plan are made with before tax-dollars, and later the distributions are taxed as income. If she did decide to contribute to the plan she has the following choices of funds, all managed by Superior Investments Inc. She may select any combination of the funds and change the selection quarterly. A. U.S. Value Fund (USVF) a fund invested solely in stocks from U.S. firms that management believes to be undervalued. B. Research & Technology Fund (RTF)a fund specializing in stocks and companies or firms primarily emphasizing computer services and programming. C. Global Equities (GE)a fund invested solely in stocks of firms with international operations, such as Sony. D. Government Bond Fund (GBF)a fund devoted to debt issued or guaranteed by the federal government. E. High-Yield Debt (HYD)a fund devoted to bonds with non-investment grade ratings. F. Money Market Fund (MMF)a fund investing solely in short-term money market instruments. The historic return of each fund, the standard deviation of the returns, and the fund's beta (computed relative to the S&P 500 stock index), are provided in the table below. Ken's employer offers a defined benefit pension plan in which his retirement income depends on the average of his salary for the last five years in which he works. Since the employer guarantees and funds the plan, Ken does not understand Bozena's choices. He believes that she should participate but does not know the advantages and risks associated with each choice. Since Ken is your cousin, he has asked you to answer the following questions to convince Bozena to participate in the Traditional 401(k) plan and to help her choose an appropriate mix of the six alternative funds. Fund USVF RTF GE GBF HYD MMF Expected Return 13% 12 15 7 10 Standard Deviation 20% 10 40 8 12 Beta 0.7 1.1 1.5 .3 0.4 0.0 0 I 4 1. If Bozena participates and contributes the maximum amount to the 401(k) and earns 10% annually, how much will she have accumulated in 45 years (to age 67) even if her salary does not change? 2. If she does not participate and annually saves $1,600 on her own (non-retirement account), how much will she have accumulated if she earns 10% (before taxes) and is in the 20% federal income tax bracket? 3. If she retires at age 67, given the amounts in (1) and (2), what equal and consecutive amount can Bozena withdraw and spend each year for 20 years from each scenario? Assume she continues to earn 10% (before tax) and remains in the 20% federal income tax bracket. 4. Who bears the risk associated with Bozenas retirement income? Explain. 5. Why does Ken not have to make these investment decisions? Who bears the risks associated with his retirement plan? Explain. 6. At this point in Bozena's life, which investments do you suggest she selects for a portfolio? Explain your reasoning considering time, life situation, risk, and return; while establishing a % (weighted) specific diversified portfolio, as well as calculating the portfolio beta and expected return. (You will need to us an additional piece of paper for a full thought out answer.) Financial Advisor's Case: Retirement Plans and Investment Choices Ken Johnson's 22-year-old daughter Bozena has just accepted a job with Doctor Medical Systems (DMS), a firm specializing in computer services for doctors. DMS offers employees a Traditional 401(k) plan to which employees may contribute 5 percent of their salary. DMS will match $0.50 for every dollar contributed. Bozena's starting salary is $32,000, so she could contribute up to $1,600 and DMS would contribute an additional $800. Contributions to a Traditional 401(k) plan are made with before tax-dollars, and later the distributions are taxed as income. If she did decide to contribute to the plan she has the following choices of funds, all managed by Superior Investments Inc. She may select any combination of the funds and change the selection quarterly. A. U.S. Value Fund (USVF) a fund invested solely in stocks from U.S. firms that management believes to be undervalued. B. Research & Technology Fund (RTF)a fund specializing in stocks and companies or firms primarily emphasizing computer services and programming. C. Global Equities (GE)a fund invested solely in stocks of firms with international operations, such as Sony. D. Government Bond Fund (GBF)a fund devoted to debt issued or guaranteed by the federal government. E. High-Yield Debt (HYD)a fund devoted to bonds with non-investment grade ratings. F. Money Market Fund (MMF)a fund investing solely in short-term money market instruments. The historic return of each fund, the standard deviation of the returns, and the fund's beta (computed relative to the S&P 500 stock index), are provided in the table below. Ken's employer offers a defined benefit pension plan in which his retirement income depends on the average of his salary for the last five years in which he works. Since the employer guarantees and funds the plan, Ken does not understand Bozena's choices. He believes that she should participate but does not know the advantages and risks associated with each choice. Since Ken is your cousin, he has asked you to answer the following questions to convince Bozena to participate in the Traditional 401(k) plan and to help her choose an appropriate mix of the six alternative funds. Fund USVF RTF GE GBF HYD MMF Expected Return 13% 12 15 7 10 Standard Deviation 20% 10 40 8 12 Beta 0.7 1.1 1.5 .3 0.4 0.0 0 I 4 1. If Bozena participates and contributes the maximum amount to the 401(k) and earns 10% annually, how much will she have accumulated in 45 years (to age 67) even if her salary does not change? 2. If she does not participate and annually saves $1,600 on her own (non-retirement account), how much will she have accumulated if she earns 10% (before taxes) and is in the 20% federal income tax bracket? 3. If she retires at age 67, given the amounts in (1) and (2), what equal and consecutive amount can Bozena withdraw and spend each year for 20 years from each scenario? Assume she continues to earn 10% (before tax) and remains in the 20% federal income tax bracket. 4. Who bears the risk associated with Bozenas retirement income? Explain. 5. Why does Ken not have to make these investment decisions? Who bears the risks associated with his retirement plan? Explain. 6. At this point in Bozena's life, which investments do you suggest she selects for a portfolio? Explain your reasoning considering time, life situation, risk, and return; while establishing a % (weighted) specific diversified portfolio, as well as calculating the portfolio beta and expected return. (You will need to us an additional piece of paper for a full thought out answer.)
