BAFI3184 – Business Finance

Task 1. Pre-retirement budget

The expected income covers salary from me and my wife. Assuming that we start with no investments or savings, thus the dividend and interest are zero. Home, daily living and children account for large proportions of total expenses.

Table 1: Pre-retirement budget

Category Item Monthly Annually
Income  Salary 30,000          360,000
 Dividend                     –
 Interest rate                     –
 Expense  Home 6,300            75,600
 Daily living 5,400            64,800
 Children 5,100            61,200
 Transportation 2,500            30,000
 Health 300              3,600
 Insurance 2,100            25,200
 Education 700              8,400
 Entertainment 250              3,000
 Vacation 1,250            15,000
 Charity 100              1,200
 Investment  Saving 1,800            21,600
 Emergency fund 600              7,200
 Investment 3,000            36,000
 College saving 600              7,200


Task 2. Post retirement budget

Table 2: Post-retirement budget

Category  Item  Monthly  Annually
 Income   Salary                 –                     –
  Dividend          8,000            96,000
  Interest rate          5,000            60,000
  Expense   Home          8,400          100,800
  Daily living          5,600            67,200
 Charity             200              2,400
  Transportation          2,500            30,000
  Health             700              8,400
  Insurance          2,000            24,000
  Education                 –                     –
  Entertainment             400              4,800
  Vacation             400              4,800
  Subscription             100              1,200
 Replacement income required       (7,300)          (87,600)


Since I reach the age of 65, several changes will happen. First, no expense will be incurred for children as they both grow and have their jobs. Second, salary is no longer available; instead, interest rates and dividends from accumulated investments are now the main sources of income. Additionally, expenses related to insurance and health will rise dramatically as the health conditions worsen, while other expenses tend to decline as they are no longer necessary. Henceforth, with expected income deriving from interest and dividend amounts to 13 million per month, the expected shortage still is 7.3 million VND.

Task 3. Annuity

To fulfill this shortage, an annuity should be purchased. The expected rate is 7.9%, or 0.66% compounded monthly and the expected payment is 7.3 million, which aims to cover the replacement income required.


Thus, an annuity having present value of 880 million VND and should be purchased at my 65th birthday.

Task 4. Investment strategy and plan

As aforementioned, the essential fund for the annuity is 880 million. To accumulate such an amount of capital, I must adhere to an investment plan with regular investments based on thorough investment philosophy. Regarding the investment philosophy, I refer to the risk profile questionnaire developed by Charles Schwab and Co., Inc. ™ to determine the appropriate guidance for long-term investment. The table below presents the total marks and proposed investment strategy.

Table 3: Investment strategy

Dimension Mark Suitable strategy
Time horizon 10 Moderately aggressive:

Average return: 9.9%

Best case: 34.4%

Worst case: -29.5%

Risk tolerance 30


Identifying myself as a long-term investor, I would like to entail a considerable amount of risky assets. The details of expected returns and proportion of each investment are presented in the table below:

Table 4: Expected return of moderately aggressive allocation

Investment  Ave. Annual Return  Proportion  Expected return
 Large Capitalization Common Stocks 9.18%           0.45 4.13%
 Small Capitalization Common Stocks 11.07%           0.15 1.66%
 International Common Stocks 8.91%           0.20 1.78%
 Corporate Bonds (long-term) 7.02%           0.10 0.70%
 Government Bonds (long-term) 4.86%           0.05 0.24%
 Treasury Bills (short-term) 1.62%                0.00 0.00%
 Cash     0.00%           0.05 0.00%


Expected return: . Hence, to achieve 880 million to purchase the annuity, a monthly amount equals:

Thus, a monthly saving equals 216,710 VND should be set aside to achieve long-term goal of 880,000 million VND for retirement purpose.


Task 5. The effect of risk tolerance

It should be noted that the overall strategy will be determined largely by my private preference toward risk. This is exhibited in the resources allocation on different investments. If I change, for example, from moderately aggressive to a more short-term investment strategy, a suitable portfolio is likely to consist of a large proportion of fixed income instruments rather than equity. Although this strategy assurance liquidity as fixed income instruments provide periodic cash flows, the overall returns of this strategy are expected to be lower. As a result, the monthly saving to meet the long-term retirement goal must be increased accordingly. The figure below illustrates different expected returns as well as the required saving amount of each strategy.

Figure 1: A comparison of different investment strategies

AS observed from the table above, the expected return changes in accordant with risk perceptions of each strategy; and so do the monthly saving. In particular, monthly savings and expected return display a negative correlation. If I decide to move from a conservative allocation strategy to an aggressive allocation, the expected return claims from 5.6% to 10.22%, while the monthly saving drops from 491.81 to 130.14 thousand VND per month.


Task 6. Economic, political, and significant events

Academic scholars prefer to express the risk of an investment in terms of standard deviation for simplicity. In practice, this statistical measure is found to have limited implications and primarily serves as a benchmark only. Indeed, investment is sensitive to all types of risk arising from inside the companies as well as from the external environment. These classifications are referred to as systematic and unsystematic risks in the world of CAPM (Markowitz, 1952; Sharpe, 1964). Under this doctrine, all investments, regardless of their origins or forms, will be influenced by fluctuations in systematic and unsystematic risks. This paper primarily focuses on the systematic risk, exhibited in terms of economic, political, and special events.

Regarding the economic aspect, Lee and Kim (2018) in testing different portfolio theories, contend that portfolio consisting of stocks from emerging countries outperformed a similar portfolio of developed countries. A major reason underlying this situation is emerging countries have comparatively higher marginal productivity that that of developed countries. This couples with extensive foreign capital inflows fuel these markets with excessive resources and induce further development. Nonetheless, emerging market appear to be more sensitive, especially those depends on the foreign capital and weak macro condition with high public debt, account deficit, and others. Several studies have documented with abundant empirical evidence. Hannibalsson (2009) cited the case of Iceland as the most recent case study. After the economic explosion in the late 1990s, Iceland began the new century with utmost confidence. Nonetheless, the Icelandic economy reversed and tumbled in 2006, and became the first domino that fell and triggered the global crisis in 2008. In such cases, regardless of the type of your investments, the systematic risks would erase any attempts of the investors.

Regarding the political system, let consider the latest tension between Trump’s administration and the Chinese government. At the end of 2018, president Trump announced an official strategy to revise the persistent account deficit of the US. In his criticism, China plays the main villain with a more than 500 billion trade deficit with the US. Consequentially, a huge tax rate was levied on Chinese goods. Hence, the Shanghai Composite index slide from 3,558 to 2,500 at the end of 2018. The DJIA, after an adjustment in March 2018, recovered and reached a record high of 26,000 points. Hence, the political tension between China and the US has significant impacts on the stock markets.


Figure 2: DJIA and SHCI during the trade war

Apart from the political and economic events, some special events do have significant impacts on the expected outcome of my investments. The supply chain disruption has caused significant impacts on the worldwide economy. Moreover, the social distancing order further prevents the services industry to recover. Hospitality and tourism are perhaps the most influenced victims, thus the stock prices of hotel chains witness steep drops. On the other hand, technology companies, with the leading position of Amazon, become the most valuable companies amid the pandemic. The stock price of Amazon consistently raised regardless of the pronounced effect of the pandemic. In the same vein, the government bonds experience huge increases in the price as the growing market demand, thus lower the yield.

In general, investment of all types is sensitive to economic, political, and other special events. In most of the case, these systematic risks hardly damage the intrinsic value of the firm. However, the bias and collective behavior induce investors to engage in irrational decisions, thus creating a huge variation in the price of the investments. It should be noted that the key to any successful investments is flexibly allocating assets based on market conditions. Henceforth, rather than relying on a static strategy, a more appropriate strategy would be flexibly switching between different strategies.


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