Case 1
Case 1
Case 1
Submitted to:
Submitted by:
Brief Background
It was about three months when the husband of Mary Owen, Ralph Owen, has
passed away. Mary’s husband left behind a small fortune which he earned when he was
alive. For over 30 years, Ralph Owen worked in an engineer profession wherein he
earned plenty of benefits from the company’s retirement saving plans. Ralph had a
On the other hand, Mary devoted all her life as a mother who just stays at home,
focused on family matters, and take care of her children. Unlike Ralph who used to
manage all the financial affairs of their family, Mary is a conservative, risk-averse, and
clueless about investment matters and decisions that have to be made. After the death of
her husband, she came to realize that she is unprepared and knew nothing about decision-
Upon the advice of a friend, Mary asked at a brokerage company for the
assistance of the firm’s senior financial adviser who is Bill May to help her understand
the complexity of investments matters and assist her in deciding what to do, what plan of
Mary let Bill run through their portfolio during the first meeting. As a financial
adviser, he was shocked with how narrowly focused its composition had been. He
discovered that Ralph is a type of investor who likes to flirt with risk because as he saw
on the investment portfolio, its value had lost almost 30%. So far, Bill came into an idea
which is to diversify first the portfolio and lowering its beta. Bill as a financial adviser, is
a better idea given the status in the life of Mary and that they don’t need to flirt with the
risk that much, unlike Ralph. However, Mary is a bit clueless about what terms Bill is
talking about. Apparently, Bill settles another appointment with Mary to give her
and commodities. However, upon the death of Ralph, the investment portfolio was left to
Mary his wife. To have growing returns, knowledge about the financial market is needed.
A financial market is a place where firms and individuals enter into contracts to sell or
buy a specific product such as a stock, bond, or futures contract. Buyers seek to buy at the
lowest available price and sellers seek to sell at the highest available price. There are
several different kinds of financial markets, depending on what you want to buy or sell,
but all financial markets employ professional people and are regulated. Mary as a full-
time mother these concepts is new to her so the main problem is how will Mary handle
the situation, specifically, in managing the portfolio investment even if she is clueless
Point of View
The point of view of this case study is of Bill May who is a senior financial advisor
how can a client improve their financial life. As for the case of Mary Owen, she is not
knowledgeable on how to maximize the wealth that her husband left and is not confident
in making decisions for her husband’s investment. Bill may see the ignorance of Mary as
an obstacle that will greatly affect in terms of financial planning. Hence, his first
objective is to educate Mary on how does corporate finance works. Moreover, with Bill
May’s help, Mary will be able to distinguish what is a better investment portfolio and can
further make better decisions using the data that is shown in the portfolio.
Areas of Consideration
1. Explaining to Mary the terminologies/concept used in financial market.
Mary, the wife of Ralph, was a very conservative and cautious person. She
couple who is enjoying their married life, Ralph is the one who managed almost all
the financial affairs of the family while Mary focuses on other family matters.
Furthermore, Mary was not exposed to financial markets and when Ralph passed
away, she was unprepared to manage one’s wealth. Bill as a financial advisor, his
concept used in the financial market to better understand the investment portfolio
Ralph left.
and help them with the decision on investments. Ralph's investment portfolio has
significantly over time. Billy examined the portfolio that was left by Ralph and he
noticed that it had lost almost 30% of its value. Hence, Billy decided to diversify its
portfolio and lower its beta but unfortunately, Mary has no idea how the financial
market works. Billy needs to explain the factors that could affect the investment
Mary as being clueless about the financial markets and how does it work.
Bill’s job is to base on all the formulas and computations to be used in finding the
best combination that should be proposed to Mary. By identifying the options of best
combination, Bill will be able to explain to Mary what are the risk or the chance of
financial loss and measure the returns or the total gain or loss on investment of each
option. As a financial advisor, Bill can give Mary some tips on which of the options
she should take to improve the management of the investment portfolio left by his
deceased husband. Investors like returns and dislike risk so Mary would probably
The alternative course of action pertains to the determined options that will answer
the problem, in this case, Mary Owen’s cluelessness in managing the portfolio
investment. The first alternative course of action is to assess a portfolio with better risk
and return management. By doing the first ACA, Mary will learn how to make decisions
using the data in the portfolio. The second alternative course of action is to present and
investments are deemed best. Lastly, the financial advisor will construct a well-analyzed
ratio of the portfolio to help Mary in managing the investments without the burden of
great risk.
I. Quantitative Analysis
50% 50% Expected Standard
Scenario Probability High-tech Counter – Returns Return Deviation
(P) (H) cyclical (r) (^r ¿
(B) (H + B) ( r^ ∗P) ¿
Recession 20% -5% 20% 7.50% 1.50% 0.000198
Near 20% 2% 16% 9% 1.80% 0.000054
Recession
10.65% =0.000634
√ 0.000634
2.52%
Table 1.1- Expected Return and Standard Deviation Comprises 50% each of High-Tech
Company’s Stocks and Counter- Cyclical Company’s Stock.
High-tech Counter –
cyclical
15.4% 5.9%
Expected return
17.69% 15.69%
Standard deviation
a. Construct investment with Lower risk.
Table 1.2 - Expected Return and Standard Deviation Comprises of High-Tech
Company and Counter- Cyclical Company.
b. To further explain the advantages of diversification and help Mary think
computations)
(H + I) ( r^ ∗P) ¿
Recession 20% -5% -2% -4.10% -0.82% 0.006415362
√0.0221603051
14.89%
portfolio that comprises 70% of portfolio in the High-Tech
tech Company.
Recession
Normal 30% 15% 12% 9% 11.7% 3.51% 0.000079707
boom
Boom 20% 45% -20% 14% 13.1% 2.62% 0.000183618
10.07% =.00054181
√.00054181
2.33%
Table 3. Combination of 30:30:40 among Counter-Cyclical Co., Utility Company
financial advisor, the first thing that Bill needs to explain is the terms that are
being used. The following are the terms and concepts used in managing and
measure it.
risky and if the standard deviation is low, it means that prices are
Furthermore, these terms and concepts were used in analyzing the quantitative
and qualitative narrative above. Below is the analysis of each alternative course of action.
investors to earn a more stable rate of return. Since High-tech Co. and
over a given period. Moreover, Bill calculated the risk or the chance of
financial loss such as standard deviation that indicates the riskiness of the
assets which measures the dispersion around the expected value of these
investments in one portfolio. The data in Table 1.1 and 1.2 show that a
be much smaller than either of the two stocks’ expected standard deviation.
cyclical stocks.
assets react differently with each other. When investments in one area
portfolio that comprises 70% of portfolio in the high-tech stocks and 30%
of high-tech and index fund would not necessarily be better for Mary,
since it has much higher expected level of risk (14.89% versus 2.52%) and
presenting these portfolios to Mary, she can now understand how risk is
related to returns and learn how to make use of the information to improve
As Mary has agreed that she doesn’t need the high risk given her
status in life, Billy come-up with this diversified portfolio. Although this
portfolio is already a better option, it still has its weaknesses like low
returns compared to the 50%:50% portfolio but this only happens because
the risk is also low. The relationship between risk and return is direct that
is why the higher the risk, the higher the return, and vice versa. This
portfolio has a 2.33% of standard deviation (risk) which is not bad for a
10.07% return.
The most important thing about being an investor is to know the level of
will react differently to the same market or economic event. For instance, when the
economy is growing, stocks tend to outperform bonds. But when uncertain things may
happen and one sector will drop its value, the risk is more likely bearable and the chances
of losing an investment are shallow unlike putting all your eggs in one basket. If
investments were to put in 5 sectors wherever one of the sectors is dropping down, the
other sectors would be harmless and offset the losses in that sector. Diversification is
designed to help investors balance or limit their risk exposure. Most of the investors have
successful investments because they know how to manage their comfort level with risk.
For Mary Owen, the main problem here is her given status in life and she doesn’t
have any exposure to investing matters. Bill’s advice of diversifying the portfolio and
lowering its beta to Mary does necessarily make sense to her at first given her situation.
Although Bill would make sure that Mary will soon gain knowledge about this matter and
terminologies. This advice of Bill will help Mary minimize her overall portfolio from the
risk of loss and she will be exposed to more opportunities for returns. In diversifying the
portfolio, Bill and Mary have to choose among three alternative courses of action which
is (1) to construct investment with Lower risk., (2) To further explain the advantages of
diversification and help Mary think critically, Bill May opted to illustrate 2 different
Weighing the three courses of action, Bill can recommend and propose the third
Company, and High-tech Company since it has a least standard deviation of 2.33 with a
good expected rate of return among others. Although when you compare it with
quantitative analysis of two standard deviations, the difference is quite small and it also
bears a good return however what Bill prioritizes here is a combination of an investment
portfolio that carries a much lower risk. Option in illustrations 1 and 2 both have a good
return, however, both also have a standard deviation that is higher than alternative
courses 1 and 3. High standard deviation equals higher risk, as what has been stated
above, option 3 has the least standard deviation which means it has lower risk and it
would be an ideal decision for the investment portfolio of Mary. That is why Option 3
should be used for a much more successful investment, it deals a low risk with a fine
expected return.