Part 1: Personal Risk Assessment You can evaluate your personal willingness to take investment risks through self-reflection, by analyzing past events such as previous losses suffered and the emotions that stemmed from those losses, by speaking with knowledgeable investment advisors, and by completing one or more risk tolerance assessment questionnaires. These questionnaires use the answers you provide to various questions to score your risk tolerance and provide an asset allocation based the score you achieve. An asset allocation sets the percentage of equities, fixed income (bonds, etc.), and cash into which your portfolio assets are to be divided. Be aware, though, that these questionnaires may not always accurately define your risk tolerance; you must also use common sense. After completing a questionnaire, if you find it is not a reasonable reflection of your risk tolerance, you may find it beneficial to complete a second questionnaire from a different source. Note: Before you can purchase mutual funds in Canada, an investment advisor must complete a risk assessment for you. Required: Then prepare a submission of two or three short paragraphs in total (from three to four sentences in each paragraph), discussing personal willingness to take risk, personal ability to take risk, and unique circumstances that may apply to you. This should be done in addition to completing and submitting the risk tolerance assessment questionnaire assigned in Practice Problem 3 in Lesson 2. Recognizing your risk tolerance is imperative to understanding the types of assets you should invest in and the overall asset allocation of your investment portfolio. Your risk tolerance might change over time or with a change in your personal situation, such as getting married or having a child. Assignment 2 Part 2: Preparing Financial Statements Explain the difference between saving and investing. (5 marks) List and explain investors motivation for investing in stocks, bonds, preferred shares, and convertibles, based on the characteristics of each of these financial vehicles from the risk and income perspective of investors. (10 marks) Sylvia comes to you for advice in organizing her financial affairs. She is 29 years old and makes $50,000 per year, 30% of which goes to payroll deductions and taxes. Sylvia also receives interest of $400 per year from miscellaneous investments and savings accounts. Sylvia has tracked her expenses for the last six months and provides you with the following estimates for the year: Mortgage payments, including property taxes and interest $5,886 ($3,094 is interest) Groceries $3,600 Holidays $3,500 Car payments, including interest $4778 ($958 is interest) Utilities $3,000 House and car insurance $1,600 Gas for auto $2,200 Auto maintenance $600 Life and disability insurance premiums $400 House maintenance $1,500 Household expenses $600 Medical and dental expenses $400 Entertainment and lunches $5,500 Gifts $1,400 Clothing $3,400 Miscellaneous expenses $3,200 Sylvia has the following assets: House value $100,000 Cash in the bank $1,800 CSBs $8,000 Furnishings and personal assets $18,000 Auto $20,000 RRSP $28,500 Sylvia has the following debt: Credit card balances owing $2,800 Line of credit owing $5,000 Mortgage $62,000 Car loan $18,500 Required: a. Based on the information provided, prepare a net worth statement and an annual cash flow statement for Sylvia. (10 marks) b. Sylvia also has plans for saving and investing, and wants to find a way to pay herself first. She is willing to make adjustments to her spending habits and would like to see the effect of putting away 10% of her net pay for investing. Draw up a proposed future cash flow budget that will incorporate her ideas. (5 marks) Explain three advantages and three disadvantages of investing in mutual funds rather than directly investing in assets such as stocks and bonds. (6 marks) Discuss why investors may …
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