Q8. An analyst is developing an investment policy statement for Sally Edgewood, a 48-year old orthodontist with an annual income in excess of $400,000. Edgewood has accumulated an investment portfolio with a current value of $4 million. Her portfolio is concentrated in small capitalization stocks with a bias toward high-tech companies. She has expressed a desire to earn a return equal to the return of 12 percent above the return of the Russell 2000 small capitalization stock index. Edgewood lives well on 50 percent of her annual income. She has always been a ski enthusiast and this year she plans to purchase a second home in the mountains in western Wyoming. This purchase will be mortgaged and require her to make an $80,000 down payment. Edgewood plans to retire at the age of 63 and is currently paying taxes at a rate of 30 percent on both income and capital gains.

Which of the following most accurately portrays Edgewood’s overall risk tolerance? Edgewood’s willingness:

A)   and ability to accept risk is above average. Thus, her overall risk tolerance is above average.

B)   to accept risk is average and her ability to accept risk is above average. Thus, her overall risk tolerance is average.

C)   to accept risk is above average and her ability to accept risk is average. Thus, her overall risk tolerance is average.

Q9. Which of the following most accurately describes Edgewood’s tax, liquidity, and time horizon constraints? Edgewood’s overall time horizon is:

A)   long, her tax constraints are significant, and her liquidity needs are high.

B)   short, her tax constraints are significant, and her liquidity needs are low.

C)   long, her tax constraints are significant, and her liquidity needs are low.

答案和详解如下：

Q8. An analyst is developing an investment policy statement for Sally Edgewood, a 48-year old orthodontist with an annual income in excess of $400,000. Edgewood has accumulated an investment portfolio with a current value of $4 million. Her portfolio is concentrated in small capitalization stocks with a bias toward high-tech companies. She has expressed a desire to earn a return equal to the return of 12 percent above the return of the Russell 2000 small capitalization stock index. Edgewood lives well on 50 percent of her annual income. She has always been a ski enthusiast and this year she plans to purchase a second home in the mountains in western Wyoming. This purchase will be mortgaged and require her to make an $80,000 down payment. Edgewood plans to retire at the age of 63 and is currently paying taxes at a rate of 30 percent on both income and capital gains.

Which of the following most accurately portrays Edgewood’s overall risk tolerance? Edgewood’s willingness:

A)   and ability to accept risk is above average. Thus, her overall risk tolerance is above average.

B)   to accept risk is average and her ability to accept risk is above average. Thus, her overall risk tolerance is average.

C)   to accept risk is above average and her ability to accept risk is average. Thus, her overall risk tolerance is average.

Correct answer is A)

Edgewood’s ability to assume risk is above average as indicated by the fact that her income is relatively large and exceeds her annual living expenses by a substantial amount. Also, being invested in small, high tech firms is an indication of Edgewood’s above average willingness to accept risk.

Q9. Which of the following most accurately describes Edgewood’s tax, liquidity, and time horizon constraints? Edgewood’s overall time horizon is:

A)   long, her tax constraints are significant, and her liquidity needs are high.

B)   short, her tax constraints are significant, and her liquidity needs are low.

C)   long, her tax constraints are significant, and her liquidity needs are low.

Correct answer is C)

Edgewood’s overall time horizon is long—25 years or more—and it consists of two states: pre-retirement and post-retirement. A 30 percent income and capital gains tax is significant. Her liquidity needs are low and can easily be paid out of income.

thx

Thank you!

Thank you!