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
Question 9
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
Question 4
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
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