Q4. Marjorie Ward is 52 years old and is the CEO and chairman of the board of a large professional services firm located in the Southeast U.S., Madison Professional Services. Ward has approached Tim Lee, her financial planner, for help in preparing an investment policy. Frank Weatherford is Lee’s assistant.

In their lunch meeting with Ward, Ward provides some background for Lee and Weatherford. When she graduated from college, her parents provided her the funds to purchase Madison Professional Services. Madison was a small firm at that point, but Ward has grown it into one of the larger firms in its industry. The growth did not come without some difficult periods, however. The professional services industry is cyclical and is susceptible to economic recessions. Madison went public eight years ago and Ward retained a majority shareholder position when it did. She has a controlling position in the firm and Madison represents nearly three-quarters of her portfolio. Although she would like to diversify her portfolio, she does not want to send out negative signals to other shareholders or the employees of the firm.

Lee states that diversification issues are common with executives and the heirs to executives. He states that Ward should consider using an exchange fund. He states that in an exchange fund, the investor contracts with a securities dealer to sell his or her holdings discreetly in an over-the-counter contract. The investor provides the dealer company shares and in return receives a return based on an exchange-traded fund. He states that the disadvantage of an exchange fund is the management fees that the investor must pay. Despite these fees, he believes that an exchange fund represents an attractive option for Ward.

Weatherford mentions that Ward should also consider using a completion portfolio to achieve diversification. He states that in this method, Ward would invest in a target portfolio that would provide for diversification. In her case, Ward’s target portfolio would not include professional services firms, as that is the focus of Madison. The target portfolio could be structured to mimic an index such as the Wilshire 5000, except for the professional services firm exposure. Weatherford states that the advantage of this approach is that diversification can be achieved rather quickly so that risk is quickly eliminated.

Lee and Weatherford discuss the effectiveness of various account structures, including personal accounts, variable life insurance products, tax-deferred pension vehicles, and foundations. Lee states that a variable life insurance product has the advantage of tax minimization efficiency, a time horizon that matches the individual’s life expectancy, and investor access that depends on the type of policy. Weatherford states that a foundation typically has an infinite life. He states that it is not a good vehicle for wealthy investors, however, because it is not an efficient tax minimization vehicle.

The following week Lee and Weatherford attend a conference on behavioral finance, where its differences from traditional finance and fixed planning horizon strategies are discussed. Lee and Weatherford talk about what they learned that week and how they can use it to better understand their clients’ biases and how to help them. One of the things he has learned, Lee states, is that in behavioral finance, most investors tend to think of investment goals in terms of the terminal dollar value and the probability of not meeting that goal, as opposed to traditional finance where the investment goals are the expected return and standard deviation. Weatherford adds that behavioral finance also recognizes that investors tend to think of investment goals in isolation from one another, which is a mental accounting approach.

In their next meeting with Ward, Ward reveals that she is thinking of buying a beach house in Southwest Florida when she retires in 13 years. She is not sure how much she will have to spend when she retires, but is thinking that she will buy a one-bedroom, gulf view condo in a gated community. If she does not have the money for a gulf view unit she will settle for an interior unit without a view. She asks Lee and Weatherford to investigate the funding of either unit. Lee gathers the following figures:

While investigating the funding of Ward’s condo, Lee and Weatherford compare the lifestyle protection strategy to the fixed planning horizon method as investment policies. Lee states that if it is important to Ward to retain the possibility of buying the gulf view condo, she would be better off utilizing the fixed planning horizon method as her investment policy. Weatherford states that if she ends up buying the condo before retirement, she also would be better off using the fixed planning horizon method as her investment policy.

Are Lee’s statements concerning the description of an exchange fund and identifying its disadvantage correct?

          Description
of an exchange fund              Identifying its disadvantage

A)   Correct                                  Incorrect

B)   Incorrect                                Correct

C)   Correct                                  Correct

答案和详解如下：

Correct answer is B)

Lee incorrectly describes an exchange fund. In an exchange fund, the investor contributes their shares to a common diversified pool of stock that similar investors have contributed to. The investor makes a commitment to keep their shares in the fund for a period of time after which they can withdraw a proportionate share of the fund. Lee is correct, however, in describing a disadvantage of an exchange fund. The investor must pay management fees in an exchange fund.

Thank you!