Reading 14: Managing Individual Investor Portfolios －LOS j 心情

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Q5. Dan Kreuz, age 35, is a supervisor with BHS Consumer Finance and earns an annual salary of $95,000 per year before taxes. His spouse, Szeren Kreuz, age 36, is a marketing manager for a firm specializing in rental property, and earns $55,000 per year. Dan and Szeren recently inherited $800,000 from Szaren’s father’s estate. In addition to their income and their inheritance, the Kreuz’s have accumulated the following assets:

• $10,000 in cash

• $150,000 in stock and bond mutual funds

• $240,000 in BHS common stock.

The Kreuz’s annual living expenses are $90,000 per year and their tax rate is 40 percent. After-tax salary increases will offset any future increases in living expenses. 

In a discussion with their financial advisor, Joel Douglas, the Kreuz’s express concern about having enough assets for a comfortable retirement. The Kreuz’s make the following comments to Douglas:

• We want to retire in 20 years.

• We were very uncomfortable with the decline in the stock market from 2000-2002, and cannot tolerate a drop in our investments of more than 10% in any given year.

• We do not plan to have children.

After the discussion with Douglas, he goes back to his office to prepare an investment policy statement for the Kreuz’s. He determines that to meet their goals, they will need $2,500,000 in 20 years. Which of the following is the most appropriate description of the risk objective for the Kreuz’s?

          Willingness to Take Risk          Ability to Take Risk                      Overall Conclusion

 

A)       Below Average                         Below Average                              Below Average

B)       Below Average                         Above Average                             Below Average

C)       Below Average                         Above Average                             Above Average

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答案和详解如下：

Q5. Dan Kreuz, age 35, is a supervisor with BHS Consumer Finance and earns an annual salary of $95,000 per year before taxes. His spouse, Szeren Kreuz, age 36, is a marketing manager for a firm specializing in rental property, and earns $55,000 per year. Dan and Szeren recently inherited $800,000 from Szaren’s father’s estate. In addition to their income and their inheritance, the Kreuz’s have accumulated the following assets:

• $10,000 in cash

• $150,000 in stock and bond mutual funds

• $240,000 in BHS common stock.

The Kreuz’s annual living expenses are $90,000 per year and their tax rate is 40 percent. After-tax salary increases will offset any future increases in living expenses. 

In a discussion with their financial advisor, Joel Douglas, the Kreuz’s express concern about having enough assets for a comfortable retirement. The Kreuz’s make the following comments to Douglas:

• We want to retire in 20 years.

• We were very uncomfortable with the decline in the stock market from 2000-2002, and cannot tolerate a drop in our investments of more than 10% in any given year.

• We do not plan to have children.

After the discussion with Douglas, he goes back to his office to prepare an investment policy statement for the Kreuz’s. He determines that to meet their goals, they will need $2,500,000 in 20 years. Which of the following is the most appropriate description of the risk objective for the Kreuz’s?

          Willingness to Take Risk          Ability to Take Risk                      Overall Conclusion

 

A)       Below Average                         Below Average                              Below Average

B)       Below Average                         Above Average                             Below Average

C)       Below Average                         Above Average                             Above Average

Correct answer is B)         

The Kreuz’s indicate a below average willingness to take risk based on their unhappiness with the 2000-2002 bear market in stocks and an unwillingness to accept a decline in the value of their portfolio of more than 10%.
The ability to take risk is best classified as above average. They have a substantial asset base, a long time horizon, and do not depend on their portfolio to meet their living expenses. Their after-tax income is $150,000(1 - 0.4) = $90,000, which exactly covers their living expenses. Also, their required return is equal to N = 20; PV = $1,200,000; FV = $2,500,000; PMT = 0; CPT I/Y → 3.74% on an after-tax basis, which is equal to 3.74 / (1 - 0.4) = 6.23% on a pretax basis, which is a reasonable return for a balanced portfolio.
Overall, with an above average ability and below average willingness, their risk objective is below average as their willingness to take risk dominates their ability to take risk in determining overall risk tolerance. On the exam, if a conflict arises between willingness and ability to take risk, honor willingness to take risk unless doing so would jeopardize the portfolio’s ability to meet investor goals.

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