Solution Pages: 20 (Word Count: 8039)
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Questions Covered in the Solution:
- Explore the consistency or lack of consistency between William Sharpe’s FINANCIAL ENGINES Robo-advisor and his CAPM
- Compare and contrast the three risk tolerance questionnaires below. Discuss in relation to the Robo vs. human advisor controversy.
- Is SMART BETA real or imaginary, i.e., is it a useful concept or a marketing gimmick?
- Your partner is a law clerk to US Supreme Court Justice Elena Kagan. She (your partner the clerk) suffers from finance anxiety and never took a finance course. She is writing a brief for Justice Kagan for the case of Beneficiaries of MIT Pension Fund vs. MIT Board of Trustees. Prepare for her a complete but concise summary of the finance issues involved. Keep it politically neutral.
- Explain why the equity risk premium (ERP) is, simultaneously, both so simple and so complex.
- Your mother teaches 8th graders. Her class is working on a government- required financial literacy exercise. She asks you to visit the class to explain ANNUITIES. Prepare by writing a detailed outline of the necessary points that must be made. REMEMBER: Your audience is 8th grade kids. Speak to them in a language they can understand or their teacher, your mother, will kick you out of the room.
- Part (A) Perform the requisite analysis to determine if they are on track to reach their retirement goal. Part (B) Recommend an asset allocation for their 403(b) defined contribution plan. Assume any additional information, if needed. Part (A)(Part B)
Sample/ Structure of Solution
Explore the consistency or lack of consistency between William Sharpe’s FINANCIAL ENGINES Robo-advisor and his CAPM
Williams Sharpe’s Robo-advisor is a peculiar service available to the potential consumers. Sharpe is sighted to provide people with customized plans and packages on how to manage and control their revenues and expenses, through his distinguished Robo-Advisor. He believes that people today have inadequate knowledge of how to manage their financials. Hence through his Robo-advisor scheme, he plans to assist all such people. Moreover, through this Robo-advisor, Sharpe aims to help people sort out their retirement plans as well. Effectively, Robo-advising by Sharpe also assists the individuals while formulating their pension plans. While the model of this system is simple and is based on easy mechanics that can be understood by all.
Compare and contrast the three risk tolerance questionnaires below. Discuss in relation to the Robo vs. human advisor controversy.
In the first link of Vanguard, the questionnaire starts off with the basics of income and revenue that the person gets. This helps identify their income inflow and estimate the background of the person. Once the income level is established, the questions aim to check if the person is a risk taker, risk averse or indifferent to risk. This helps the questionnaire to make a better investment decision for the person. After the income details, there are certain situational questions, in these, the person is asked as to how would they react if the stock or bond market went down and they had certain investments in it.
Part (A) Perform the requisite analysis to determine if they are on track to reach their retirement goal. Part (B) Recommend an asset allocation for their 403(b) defined contribution plan. Assume any additional information, if needed.
The requisite analysis has been conducted as exhibited the appendix 2, which has explicitly depicted that, John and Jane are making enough payments/investments to their retirement plan that they can essentially maintain their current life style even after their retirement. Furthermore the calculation that are exhibited in the appendix are also based on some assumption which are peculiar in the definition of the efficiency of this prevailing retirement plan. Since, both John and Jane are 50 Years old and have committed to work till 67 years of their age, they would have 17 years to accumulate investment in their portfolio which would eventually be able to make regular payments