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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.
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.
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
($3,094 is interest)
Car payments, including interest
($958 is interest)
House and car insurance
Gas for auto
Life and disability insurance premiums
Medical and dental expenses
Entertainment and lunches
Sylvia has the following assets:
Cash in the bank
Furnishings and personal assets
Sylvia has the following debt:
Credit card balances owing
Line of credit owing
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.
- 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 be attracted to investing in ETFs rather than mutual funds.
- Describe why investors will commonly allocate a reasonable percentage of their investment portfolio to bonds. (5 marks)
- Describe the difference between an investor that has a high risk tolerance and an investor with a low risk tolerance. (5 marks)
This section is for Part 3 preparation:
Company Analysis (do not submit for marking; this activity is intended to help you complete Assignments 2 3rd Part)
Select two companies that presently trade on the Toronto Stock Exchange (TSX). You can obtain the two companies from daily stock reports in your newspaper or by looking through TSX-listed companies on the TSX website (www.tsx.com). Try to choose companies from different industry groups.
Check for new information on each of your selected companies at least once a week. Commentaries on companies may appear in the press or financial press, both hard copy and eformat. A great site for finding news stories is Globe Investor. At this site you can obtain stock price and company information. Press releases issued by the companies (which are usually posted on their respective websites) are also good sources of information, as is the website. At the top of the home page, click Issuer Profiles. Then, under Public Companies, click the first letter of the company you are looking for and search through the list for the company.
Keep a written record of share prices and volumes traded on a weekly basis. This information can be obtained from either the TSX or the Globe Investor website. Maintain your record in either MS Excel or MS Word for your own information—while this document does not need to be submitted, it will be helpful when you are answering questions in the upcoming Assignments 2 3rd Part.
Ensure that you can justify any stock purchase or sale you make (i.e., it is consistent with your objectives and investing profile).
The objective of this exercise is not necessarily to maximize the returns you make, but rather to demonstrate your understanding of investment principles and techniques appropriate for meeting your investment goals.
Part 3: Investment Activities
To better manage the stocks of the two companies you selected in above section, it is a good idea to prepare a “top-down” fundamental analysis. The top-down approach refers to analyzing the economy and the industries in which the two companies are involved, as well as the companies themselves.
- Analyze current and recent economic conditions. Provide a two-page (maximum) economic summary. Identify whether the economy is expanding (booming) or contracting (in recession). Justify your conclusion by citing economic statistics and trends over the past three years. You can obtain economic data from the Statistics Canada website. Analyze and interpret data trends (e.g., unemployment, inflation, real GDP, interest, housing starts) over the most recent three-year period to evaluate the economy and Canada’s current economic status. (10 marks)
- Briefly describe political and social trends that might affect the success of your companies in the long term. How will these trends affect your companies’ stock values? (5 marks)
- Describe the business sector or industry in which each of the two companies operates. Focus on information that helps you understand whether the industry is healthy or struggling. Try to find news stories about these industries in the media and other sources, including searching the Internet. You can access The Globe and Mail and Financial Post. You can also access company news stories at the Globe Investor website by typing the trading symbol of a company into the Search box and clicking News. These news stories may be specifically about your company or about the industry and the company’s competitors. (5 marks)
- For each of the companies you have selected, find financial statements at the company’s website or at SEDAR for the three most recent fiscal year ends. Then, for each company, perform the following steps (20 marks):
- Table the revenue/sales dollar amounts and net income after-tax dollar amounts for at least a three-year period.
- Calculate all of the ratios (liquidity ratios, financial leverage ratios, etc.)—shown in the learning objectives in Lesson 3—for each of the companies for each fiscal year end over the past three years. If a ratio is irrelevant—for example, if there is no inventory in your chosen company (such as a bank or other service company)—then indicate “not applicable.”
- Be sure to show your complete calculations.
- Identify the business/product cycle of your companies. Does the company introduce new products from time to time? Are current products still increasing sales, are they levelling off, or are they declining? How does this compare with competitors’ product cycles? Are each company’s business cycles cyclical, counter-cyclical, or non-cyclical?
- Identify and explain the risks that apply to each of the two companies’ stocks.
- Assess management’s abilities and strategies to the extent that information is available. (You can find management and strategy information by reading management reports in each company’s financial statements or at sites such as those indicated in Step 3 above.)
- Incorporating the information gathered in the “top-down” fundamental analysis in
Steps 1 to 4 above, provide a one-page summary for each of your companies indicating
- your projection of company performance and resulting stock prices over the short term (one year) and longer term (five years). Explain your thoughts and rationale for your projections. (5 marks)
- your personal risk tolerance (based on the assessment you have just done for Assignment, Part 1) and how good a fit these equity investments are for you, given your analysis above. (5 marks)