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CFP® Study Tip

In the June e-newsletter, I included the following portfolio for a hypothetical client, John Wright, as of June 1, 2011.

John Wright as of June 1, 2011:

Securities # Shares / Units Cost Current Price Market Value
Bonavista Oil and Gas Income Trust 300 $26 $30 —
BlackRock S&P/TSX 60 i shares ETF units 400 $42 $40 —
GrowthWorks LSVCC Fund – investing in BC companies only 500 $14 $12 —
CIBC $25 Par 5% Preferred Shares, Series E 200 $24.50 $27 —
Dynamic Canadian Corporate Bond Fund (Mutual Fund) 200 $8 $14 —

 

Securities Face Value Cost Current Price Market Value
CSBs, Series 42, C bonds maturing Nov. 1, 2016(current minimum interest rate, 3%) $14,000 $100 $100 —
GOC T-bills maturing in 60 days (yield; 2.44%) $10,000 $99.60 $99.60 —
Province of BC, 4.75% bonds maturing March 1, 2015 $15,000 $102.50 $104 —
GOC stripped coupons maturing in 10 years $2,500 $67.30 $67.30 —

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You were asked to answer two questions.

Question One: Determine the asset allocation for John Wright’s account as of June 1, 2011, in respect to cash investments, fixed income investments and equity investments.

The following information is required to determine the asset allocation for John Wright.

Security Cost   Market Value  
Bonavista Oil and Gas Income Trust $7,800 [300 x $26] $9,000 [300 x $30]
Black Rock S&P TSX 60 i shares ETF units 16,800 [400 x $42] 16,000 [400 x $40]
Growth Works LSVCC Fund 7,000 [500 x $14] 6,000 [500 x $12]
CIBC $25 par 5% Pref Shs Series E 4,900 [200 x $24.50] 5,400 [200 x $27]
Dynamic Canadian Corporate Bond Fund (Mutual Fund) 1,600 [200 x $8] 2,800 [200 x $14]
CSBs, Series 42 C Bond 14,000 [At Par] 14,000 [At Par]
GOC T-bills 9,960 [$10,000 x 0.996] 9,960 [$10,000 x 0.996]
Province of BC 4.75% bonds 15,375 [$15,000 x 1.025] 15,600 [$15,000 x 1.04]
GOC stripped coupons 1,682.50 [$2,500 x 0.6730] 1,682.50 [$2,500 x 0.6730]
Total $79,117.50   $80,442.50  

The market value of John’s portfolio as of June 1, 2011, is $80,442.50.
The asset allocation is as follows: 29.78% ; 31.68% ; 38.54%
The asset allocation is: Cash investments: 29.78%
Fixed income investments: 31.68%
Equity investments: 38.54%

Cash Investments: 29.78%
  • CSBs $ 14,000  
  • GOC T-bills     9,960 [$10,000 x 0.9960]
Total cash investments $23,960  

Cash as a % of portfolio = 29.78% 
                      
Fixed Income Investments: 31.68%
  • Dynamic Canadian Corporate Bond Fund $2,800 [200 x $14]
  • Province of BC 4.75% bonds 15,600 [$15,000 x 1.04]
  • CIBC $25 par 5% Pref Shs Series E 5,400 [200 x $27]
  • GOC Stripped Coupons    1,682.50 [$2,500 x 0.6730]
Total fixed income investments  $25,482.50  

Fixed Income as a % of Portfolio = 31.68%

Equity Investments
• Bonavista Oil and Gas Income Trust $ 9,000 [300 x $30]
• BlackRock S&P TSX 60 i shares ETF units 16,000 [400 x $40]
• GrowthWorks LSVCC Fund     6,000 [500 x $12]
Total Equity  $31,000  

Equity as a % of portfolio = 38.54%

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Question Two: If John liquidated his investments as of June 1, 2011, what would be the capital gain or capital loss on the portfolio?

Answer:

If all the securities are liquidated, there would be a $1,325 capital gain.

  $80,442.50 (see market value column from Answer One)
  – 79,117.50 (see cost column from Answer One)
The capital gain is : =  $1,325.00  

John would have to declare interest income on the CSBs, T-bills, corporate bond mutual fund and stripped coupons.

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General Comments on the FPE1™ and FPE2™ Examinations

Several questions on the FPE1 and FPE2 Examinations could be similar. For example, assume you are given a case study similar to the John Wright case, on a FPE1 or FPE2 Examination. On the first exam, you would be tested on details of the case study in a multiple-choice format. For example:

Question:
Based on the John Wright case study, what is John Wright’s asset allocation for cash, fixed income and equity securities, respectively?

  1. 18,58%  ;  39.45%  ;  41.97%
  2. 15.95%  ;  25.23%  ;  58.82%
  3. 29.78%  ;  31.68%  ;  38.54%
  4. 35.17 % ;  36.25%  ;  28.58%

On the FPE2 Exam, most answers are required in written format as opposed to multiple-choice. If a case study similar to the John Wright case study is provided, you will be required to determine the asset allocation and show your work. You would probably be provided with significant personal and financial information about the client including: age; marital status; dependants; net worth; investment objectives; risk tolerance; time horizon; unique considerations; and more. From here, you could be asked questions such as:

  • Comment on the appropriateness of the portfolio for John Wright, in respect to his client profile.
    (3 marks)
  • What changes would you recommend in John’s existing portfolio? Also recommend a new asset allocation to better meet John’s needs. Justify your answer.
    (7 marks)

If you are provided with more details about John’s specific securities, including the betas of the stocks and managed equity products as well as the credit ratings and durations of the fixed income securities and managed fixed income products, you could also be asked about the appropriateness of these securities, and what changes you would recommend.

It is important that you come up with key points and to justify your answers on the FPE2 Exam.

Good luck on your studies!

Sincerely,

Ron Foran, CFP, CFA, CLU, FCSI
President, Foran Financial Institute


Note: Advocis does not award the CFP® and Certified Financial Planner® designation. The right to use the marks CFP®, CERTIFIED FINANCIAL PLANNER® and CFP(logo) is granted under licence by FPSC to those persons who have met its educational standards, passed the FPSC's Certified Financial Planner Examination, satisfied a work experience requirement, and agreed to abide by FPSC Code of Ethics.