As an investment advisor for Wealth Securities Inc., you had just met with a potential new client, Lisa Wilson.
finance
Description
Investment Decision Assignment 1 (15%)
As an investment advisor for Wealth Securities Inc., you had just met with a potential new client,
Lisa Wilson. Your task was to help Lisa to analyze the current positions and returns of some of the
securities currently held by her and recommend a new investment portfolio to her that is consistent
with her risk and return objectives.
THE CLIENT
During the initial meeting, Lisa indicated that her investment return objective was to earn a 9% total
return per year. You helped her assess her risk preferences and it was concluded that she could
accept up to a 20% portfolio volatility, measured by standard deviation in her portfolio in any one
year.
PREVIOUS ADVICE
Lisa indicated that she was seeking advice regarding the two existing investments she has. Below is
the information regarding the two investments.
Investment 1:
A year ago, Lisa bought 100 shares of TD bank stock on margin at $80 per share. Initial margin is
50% and the maintenance margin is 40%. TD Bank paid an annual dividend of C$3.06 per share last
year. Interest rate for the margin loan is 5%. The stock price drops to $62 now after one year.
Due to the high growth in business, TD’s dividends are expected to grow by 10% for the next 3
years. From year 4 on, the dividends will grow constantly at the sustainable growth rate. TD bank
follows a stable dividend payout ratio of 45%. As of the second quarter of 2020, The company has
net profit margin of 27.5%, asset turnover of 0.0218 and equity multiplier of 17.84. The required
rate of return of TD stock is 7.5%.
