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What is important for a financial planner to analysis risk-return?

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019
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Scenario #6: Heidi has always been a real estate investor. Shetells her financial planner that, because she is such an expert,it’s the only asset worth investing in. However, after a thoroughassessment of Heidi’s actual performance, net of costs, her rate ofreturn over time has been about 3.5%/yr on her real estateinvesting. This is not a bad return, but her planner shows her thatdiversifying her assets into other investments will not only earnher more return over the long-term, but also reduce her risk(because real estate will not always perform well, and other assetsmay-when real estate does not do so well). Heidi just can’t believethat something she is so comfortable with could not be as optimalas what her planner is proposing. 1) What behavior/bias is present?2) Why is this behavior detrimental? 3) What could have been donedifferently, or what could be done differently next time to avoidthis result?

1) Ean inherited an annuity worth $3,643.34 from his uncle. The annuity will pay him four equal payments of $1,100 at the end of each year. What rate of return is the annuity fund offering?

a. 9.44%

b. 8%

c. 6.96%

d. 10.80%

2) Ean's friend, Ian, has hired a financial planner for advice on retirement. Considering Ian's current expenses and expected future lifestyle changes, the financial planner has stated that once Ian crosses a threshold of $8,310,521 in savings, he will have enough money for retirement. Ian has nothing saved for his retirement yet, so he plans to start depositing $70,000 in a retirement fund at a fixed rate of 8% at the end of each year. How long will it take for Ian to reach his retirement goal?

a. 25.97 years

b. 30.55 years

c. 38.19 years

d. 41.24 years

Your financial planner offers you two different investment plans.  Plan X is a $10,000 annual perpetuity. Plan Y is a 17-year, $14,000 annual annuity.  Both plans will make their first payment one year from today. At what discount rate would you be indifferent between these two plans?

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