In this case study, you are a financial advisor and will be asked to provide advice to a client seeking to understand the performance of their inves

In this case study, you are a financial advisor and will be asked to provide advice to a client seeking to understand the performance of their investment in equity shares of a company and on his super fund. You will be asked to calculate different types of returns for their investment using the data provided and do certain calculations related their super and advice on whether switching the super fund is advisable.

To support your advise, please provide all the calculations you have performed:

Investing in equity and a super fund

Case Study

Mr Peter Clark has been investing in equity shares of company X since 2019. The share prices and dividends of this company are as follows:

Table 1. Share prices and dividends

Year Share price at the beginning of the year ($) Dividend paid at the end of the year ($)

2019 220 4

2020 222 3

2021 221 2

2022 223 3

At the beginning of 2019, Peter bought 600 shares of company X. At the beginning of 2020, he sold 250 of these shares. At the beginning of 2021, he sold another 150 shares and sold all the shares at the beginning of 2022.

The average market return is 4%, and the risk-free rate of return is 2%.

You have estimated the single-factor and Fama-French (FF) three-factor model for company X and the estimation results are as follows:

Table 2. Estimation results for single factor and FF three-factor model for company X.

Single-factor model Multi-factor model

Intercept 0.701 (2.01) 0.880 (0.95)

Rm-Rf 1.50 (6.51) 1.135 (1.50)

SMB 0.350 (1.15)

HML 0.490 (1.68)

R^2 0.71 0.51

Residual error 3.07% 4.51%

Table 3 shows estimated beta and alpha for companies X and Y.

Table 3. Estimated beta and alpha for company X and company Y.

Company X Company Y

Beta 1.5 1

Alpha 2% 1%

In addition to investing in shares, Mr Clark has been employed since 1 January 2021. From this job, he received an annual salary of $80,000. In addition to his salary, he is reimbursed $190 per month for his phone bill and $350 per month as transport expenses to work. His agreement with his employer allows him to work overtime, and he has received $700 per month since 1 January 2021.

Image byTima MiroshnichenkoYou will provide this advice by developing answers to the 5 case study questions (See below)

CASE STUDY QUESTIONS

In your analysis, you are to perform the following tasks:

Calculate arithmetic, geometric and dollar-weighted returns to 3 decimal places from Peters investment and advise Peter if he has earned a return commensurate with risk.

Comment on the estimates of the single-factor model and multi-factor model. Which model is better for estimating the return of company X. Justify your answer.

If the risk premiums of SMB and HML are 3% and 2%, respectively, estimate the expected return of company X using the three-factor model.

If the expected return of X company is 7% would you buy it. Justify your reason.

Using the data in Table 3 make a portfolio combining companies X and Y to eliminate systematic risk and explain if there is any arbitrage opportunity. If there is any arbitrage opportunity what action would you take to take advantage of it. Explain.

Using the calculations you performed for question 5, estimate the net return, if there is an arbitrage opportunity.

Explain how you treat Peters salary, reimbursement of the mobile bill and his transport allowance by his employer in determining the earnings eligible for super guarantee. Estimate the amount of super in Peters account as on 31 December 2022.

Peter is 50 and contributes to a defined benefit plan. He is thinking of switching to a defined contribution plan. Advise Peter on the advantages and disadvantages of switching to a defined contribution plan.

(Note: Please include your calculations in an Excel file along with your explanations and analysis.)