MAJOR ASSIGNMENT ASSESSMENT: 30%

MAF101 – FUNDAMENTALS OF FINANCE TRIMESTER 1, 2019

DUE DATE: Friday 10 May 2019 at 6.00pm

ASSIGNMENT INSTRUCTIONS – READ CAREFULLY

1. This assignment is to be submitted in groups of THREE or FOUR (no more and no

less).

2. SUBMISSION:

(a) You MUST submit ONE HARDCOPY ONLY PER GROUP, failure to do so will
incur a penalty of 5 marks. Each student must submit an Assignment Attachment
Form with the assignment and place the completed assignment in the Lecturer’s
locker located on level 4, Building la. Waterfront students may submit electronically
through Turnitin. The group must also complete the Group Assignment Declaration
Form (each student should sign the sheet) and attach it immediately following the
assignment cover sheets. Failure to do so will incur a penalty of 2 marks.

(b) You MUST ALSO submit ONE electronic copy (ONLY) PER GROUP, failure to do
so will incur a penalty of 5 marks. MORE THAN ONE SUBMISSION IN A GROUP WILL
ATTRACT A PENALTY OF 5 MARKS. The file should be submitted through the Turnitin
Link provided on the Moodle website in week 9. Please ensure that the file also
includes the Group Assignment Declaration Form as the first page. Do NOT scan the
assignment coversheet through TURNITIN. Please see Turnitin submission instructions
on the Moodle website for details on how to submit your assignment electronically.
Please note that a high Turnitin similarity index due to copying may result in your
assignment not being marked and your group being reported for academic
misconduct.

(c) Individual submission is NOT encouraged and will be penalized 5 MARKS

unless special permission has been given by the unit coordinator. (Special permission
will only be given under extenuating circumstances. Not being able to find a group
member is not an acceptable excuse. Speak to your lecturer if you are not in a group
well before the assignment is due.)

3. The assignment is to be typed, single sided and double spaced. It must include a
title page with your names and student IDs. The main body of the research should
be properly referenced (see file on Harvard Referencing Method on the Moodle
site) and include a reference list of any articles, electronic sources, etc. at the end
 of the assignment. The main body of the research should simply be the answers
to each of the questions asked as well as the completed table (there is NO need to
include the questions in your writeup). Ensure that your assignment is well
presented. The marks allocated to each of the questions are shown in the
assignment requirements (total of 55 marks). 5 marks will also be awarded for the
presentation of the title page; reference list and proper referencing (in-text
citations). Total marks = 60 which will be scaled down to 30%.

4. WORD COUNT: Minimum 1,500 words and maximum 2,000 words. Please show
word count at the end of your assignment.
5. Please note assignment submission policy, page 3 of the Unit Outline and read the
attached instructions carefully.
 PART 1 (25 marks)

Your answers to Part 1 below should show ALL relevant workings including the formulas
used and the values of the variables that will be inputted into the formulas. Final answers
should be correct to two decimal places. A word version of the Formula Sheet is available on
the Moodle site to assist with presentation.

Question 1: An insurance company is offering a new policy. The policy is bought by a

parent for a child at the child’s birth. The purchaser (the parent) makes the following
six payments to the insurance company:

First birthday: $500

Second birthday: $600
Third birthday: $700
Fourth birthday: $800
Fifth birthday: $900
Sixth birthday: $1,000

After the child’s sixth birthday, no more payments are made. When the child reaches
age 65, they receive $275,000. If the relevant interest rate is 11 percent for the first
six years and 7 percent for all subsequent years, is the policy worth buying?
(8 marks)

Question 2: You have your choice of two investment accounts. Investment A is a 15-
year annuity that features end-of-month $1,500 payments and has an interest rate
of 8.7 percent compounded monthly. Investment B is an 8 percent compounded
weekly lump-sum investment, also good for 15 years.

How much money would you need to invest in B today for it to be worth as much as
Investment A 15 years from now? (5 Marks)

Question 3: The Blassco Corporation has two different bonds. Bond A has a face
value of $30,000 and matures in 20 years. The bond makes no payments for the first
six years, then pays $800 every six months over the subsequent eight years, and
finally pays $1,000 every six months over the last six years. Bond B has a face value
of $30,000 and a maturity of 20 years. It makes no coupon payments over the life of
the bond. If the required return on both these bonds is 8 percent compounded
semiannually, what is the current price of Bond A? Of Bond B?
(9 marks)
Question 4: The Delphine Co. just paid a dividend of $1.95 per share on its stock. The
dividends are expected to grow at a constant rate of 6 percent per year indefinitely.
If investors require an 11 percent return on Delphine Co. stock, what is the current
price? What will the price be in three years?
(3 Marks)
 Part 2 (30 marks)

You are a manager of an investment fund. Your job is to advise clients on what portfolio best
suits their needs, given their characteristics. You have three different customer types:

I. A young person (Sue) with a long and successful career ahead of her.
II. A middle-aged couple (John and Karren) who earn high incomes. They plan to retire in 10
years’ time.
III. An older person (Rajesh) who is hoping to retire from work in the next 18 months.

There are 3 different portfolio packages that you offer your clients:

PORTFOLIO ALPHA: 80% shares; 10% property; 10% cash.

PORTFOLIO BETA: 50% bonds; 10% shares; 40% property.

PORTFOLIO GAMMA: 50% cash; 40% bonds; 10% property.

Your task is to answer the following questions by referring to your textbook, other finance
books, the media, the internet etc.:

1. By using the information in TABLE 1:

(a) Calculate the historical returns for each of the above portfolios for the years
between 2003 and 2018. Present the answers/numbers in the table.
(b) Calculate the expected (average) return, denoted by E(R), and risk (standard
deviation), denoted by σ, for each of the four asset classes as well as those three
portfolios. Present your answers in Table 1.

The completed table SHOULD be submitted with your assignment. Students are
encouraged to employ Microsoft Excel for these workings.
(10 marks)
2. Explain what is meant by diversifiable and non-diversifiable risk. Why are some risks
non-diversifiable? Does it follow that an investor can control the level of unsystematic
risk in a portfolio, but not the level of systematic risk? (5 marks)

3. Explain why the beta of a security in a well diversified portfolio is a more appropriate
measure of the risk of the security than the security's standard deviation.
(5 marks)

4. Rajesh who wants to retire soon tells you that he has been advised by a friend not to
invest in stocks that have high standard deviations. Is the friend’s advice sound for a
risk-averse investor like Rajesh? Why or why not? (5 marks)
 5. For each of the three customer types that you have, recommend the most suitable
portfolio option and justify your choice. Use language here that the customers will
understand. You should use a graph here to show the historical return performance of
each of your portfolios to assist with your recommendation.
(5 marks)

TABLE 1

Year Shares Property Bonds Cash Alpha Beta Gamma

2003 15.90% 8.80% 3.00% 4.90%
2004 27.60% 32.00% 7.00% 5.60%
2005 21.10% 12.50% 5.80% 5.70%
2006 25.00% 34.00% 3.10% 6.00%
2007 18.00% -8.40% 3.50% 6.70%
2008 -40.40% -54.00% 14.90% 7.60%
2009 39.60% 7.90% 1.70% 3.50%
2010 3.30% -0.40% 6.00% 4.70%
2011 -11.40% -1.50% 11.40% 5.00%
2012 18.80% 33.00% 7.70% 4.00%
2013 19.70% 7.10% 2.00% 2.90%
2014 5.00% 27.00% 9.80% 2.70%
2015 3.80% 14.30% 2.60% 2.30%
2016 11.60% 13.20% 2.90% 2.10%
2017 12.50% 5.70% 3.70% 1.70%
2018 -3.50% 2.90% 4.50% 1.90%
E (R)
Risk

Source: https://www.vanguardinvestments.com.au/

END OF ASSIGNMENT
 MAF101 GROUP ASSIGNMENT DECLARATION
Please attach this declaration immediately following the assignment cover sheet for
MAF101 GROUP ASSIGNMENT. Failure to submit this form will result in a penalty
of 5 marks. REMEMBER ONLY ONE MEMBER PER GROUP SHOULD SUBMIT
THE ASSIGNMENT THROUGH TURNITIN. MORE THAN ONE SUBMISSION IN
A GROUP WILL ATTRACT A PENALTY OF 5 MARKS.
Name of the Member submitting the assignment through Turnitin:

Name: __________________________ Student ID: _____________________

Signature: __________________________________ Date: __________________

The names and signatures (PLEASE SIGN IN PEN) appearing below serve to verify that all
group members have contributed equally (25% or 33 1/3%) or unequally (as specified in
percentage terms below). Further we have contributed meaningfully on the above basis to
the preparation of this assignment and are satisfied with one another's contribution.

Member 1:

Name: __________________________ Student ID: _____________________

% Of your Contribution to the group assignment: _______________________

Signature: __________________________________ Date: __________________

Member 2:

Name: __________________________ Student ID: _____________________

% Of your contribution to the group assignment: _______________________ Signature:

__________________________________ Date: __________________

Member 3:

Name: __________________________ Student ID: _____________________

% Of your contribution to the group assignment: _______________________ Signature:

__________________________________ Date: __________________

Member 4: (if applicable)

Name: __________________________ Student ID: _____________________

% Of your contribution to the group assignment: _______________________ Signature:

_________________________________ Date: ________________