Formulate and justify an investment policy statement setting forth the appropriate guidelines within which future investment actions should take place.
Ch 02: Asset Allocation Decision
Questions: 9 Problems: 4, 5
Mr. Franklin is 70 years of age, is in excellent health, pursues a simple but active lifestyle, and has no children. He has interest in a private company for $90 million and has decided that a medical research foundation will receive half the proceeds now and will be the primary beneficiary of his estate upon his death. Mr. Franklin is committed to the foundation’s well-being because he believes strongly that, through it, a cure will be found for the disease that killed his wife. He now believes that an appropriate investment policy and asset allocations are required if his goals are to me met through investment of his considerable assets. Currently, the following assets are available for use in building an appropriate portfolio:
$45.0 million cash (from sale of the private company interest, net of pending $45 million gift to the foundation)
$10.0 million stocks and bonds ($5 million each)
$ 9.0 million warehouse property (now fully leased)
$ 1.0 million Franklin residence
$65.0 million total available assets
a. Formulate and justify an investment policy statement setting forth the appropriate guidelines within which future investment actions should take place. Your policy statement must encompass all relevant objective and constraint considerations.
b. Recommend and justify a long-term asset allocation that is consistent with the investment policy statement you created in Part a. Briefly explain the key assumptions you made in generating your allocation.
Problem 4 and 5
Someone in the 36 percent tax bracket can earn 9 percent annually on her investments in a tax- exempt IRA account. What will be the value of a one-time $10,000 investment in five years? Ten years? Twenty years?
b. Suppose the preceding 9 percent return is taxable rather than tax-deferred and the taxes are paid annually. What will be the after-tax value of her $10,000 investment after 5, 10, and 20 years?
5. a. Someone in the 15 percent tax bracket can earn 10 percent on his investments in a tax-exempt IRA account. What will be the value of a $10,000 investment in 5 years? 10 years? 20 years?
b. Suppose the preceding 10 percent return is taxable rather than tax-deferred. What will be the after-tax value of his $10,000 investment after 5, 10, and 20 years?
Ch 03: Selecting Investments in a Global Market.
Questions: 14, 16 Problems: 4, 5
You have a fairly large portfolio of U.S. stocks and bonds. You meet a financial planner at a social gathering who suggests that you diversify your portfolio by investing in emerging market stocks. Discuss whether the correlation results in Exhibit 3.10 support this suggestion.
Alessandra Capital has been experiencing increasing demand from its institutional clients for information and assistance related to international investment management. Recognizing that this is an area of growing importance, the firm has hired an experienced analyst/portfolio manager specializing in international equities and market strategy. His first assignment is to represent Alessandra Capital before a client company’s investment committee to discuss the possibility of changing their present U.S. securities only investment approach to one including international investments. He is told that the committee wants a presentation that fully and objectively examines the basic, substantive considerations on which the committee should focus its attention, including both theory and evidence. The company’s pension plan has no legal or other barriers to adoption of an international approach; no non-U.S. pension liabilities currently exist.
Identify and briefly discuss three reasons for aIDing international securities to the pension portfolio and three problems associated with such an approach.
Problem 4 and 5
The following information is available concerning the historical risk and return relationships in the U.S. capital markets:
Investment category Arithmetic mean Geometric mean Standard Deviation of returnª
Common stock 10.28% 8.81% 16.9%
Treasury bills 3.54 3.49 3.2
Long-term government bonds 5.10 4.91 6.4
Long-term corporate bonds 5.95 5.65 9.6
Real estate 9.49 9.44 4.5
a)Explain why the Geometric mean and arithmetic mean are not equal and whether one or the other may be more useful for investment decision making.
(b) For the time period indicated, rank these investments on a relative basis using the coefficient of variation from the most to least desirable, Explain.
c) Assume the arithmetic mean returns in these series are normally distributed. Calculate the range of returns that an investor would have expected to achieve 95 percent of the time from holding common stocks.
1.You are given the following long-run annual rates of return for alternative investment instruments:
• US Government T-Bills 3.5%
• Large-cap common stocks 11.75%
• Long-term corporate bonds 5.52.%
• Long-term government bonds 4.90%
• Small-capitalization common stock 13.10%
The annual rate of inflation during the period was 3%. Compute the real rate of return on these investment alternatives.