Question 10
Michelle Wolf, CFA, owns Wolf Pack Investments, a regional money-management firm that focuses on clients in the Western United States. Wolf is preparing an investment policy statement for a new client. She believes investment policy statements (IPS) are crucial to developing a good adviser-client relationship. For Wolf, the IPS serves several purposes. Purpose 1: The IPS lists the risk and return characteristics of each investment in the portfolio. Purpose 2: The IPS communicates investors’ needs and preferences to herself and future investment advisers. Purpose 3: The IPS provides guidance in the event of changes in the market environment. Purpose 4: The IPS defines the responsibilities of the investment adviser. Wolf meets with Fred Francis, a 48-year-old professor at an elite private college. Francis has four teenage children and his wife is a homemaker. He likes managing his own money, but his work responsibilities now require enough time that he can no longer keep track of his investments. In her interview with Francis, Wolf collects the following data for use in constructing an appropriate investment policy statement: - Francis and his wife live comfortably on his $95,000/year salary and plan to maintain the same lifestyle after Francis retires.
- For his age, Francis is very healthy.
- Francis’ retirement portfolio contains $1,600,000, the result of a large inheritance and 20 years of living below his means. He currently contributes $20,000 a year to his retirement accounts. Most of the money is in taxable accounts.
- All four of Francis’ children plan to attend the college where he works – they will receive free tuition but must pay room and board.
- Francis is a conservative investor, with 60 percent of his portfolio in corporate and municipal-bond funds and the rest in large-cap stock funds.
- Francis believes financial markets are very efficient, and market prices reflect everything that is known about a security. Francis is skeptical about managers’ ability to add value.
- As a tenured professor, Francis expects to work until age 65, the college’s mandatory retirement age. After retirement, Francis will collect a pension worth 50 percent of his base salary annually, adjusted for inflation.
- Francis hopes to retire with $3,000,000, of which $500,000 will be used to set up a self-sustaining foundation to support cardiac research. His wife is a heart-attack survivor.
After constructing an IPS for Francis, Wolf considers four possible asset allocations for the Francis portfolio: Allocation 1: Index funds, 60 percent bonds and 40 percent stocks, mostly broad market funds with a few sector funds concentrated in areas Wolf believes this allocation offers the best value. Allocation 2: A mix of 30 percent bonds, 30 percent large-cap stocks, 30 percent small-cap stocks, and 10 percent hedge funds. Allocation 3: 50 percent of the portfolio in intermediate-term investment-grade bonds and 50 percent in a Wilshire 5000 index fund. Allocation 4: A market-neutral portfolio of long and short positions designed to limit exposure to market movements. Part 1) In order to craft a comprehensive IPS, which one of the following additional pieces of information provided by Francis is least important? A) How often he wants Wolf to review the portfolio. B) His expectations for interest rates. C) His comfort level with active management. D) An estimate of his children’s college expenses.
Part 2) Based on the information gathered in Wolf’s interview with Francis, Francis is least likely to be concerned with: A) liquidity. B) taxes. C) time horizons. D) return objectives.
Part 3) Based on the data Wolf collected, which of the following classifications of Francis’ risk tolerance is most appropriate? A) Low, because he is financially conservative. B) High, because he can afford to take risks in order to boost returns. C) Moderate, because despite his conservatism, Francis should take more risk in an effort to meet his long-term goals. D) It is impossible to classify without more information.
Part 4) Which of the following is least likely to be a common role of the IPS? A) Purpose 1. B) Purpose 4. C) Purposes 2 and 4. D) Purposes 1 and 3.
Part 5) Based on the information Francis provided, which of the following investment mixes is most appropriate for Francis’ portfolio? A) Allocation 1. B) Allocation 2. C) Allocation 3. D) Allocation 4.
Part 6) The last step in the planning stage of the portfolio-management process is: A) crafting an asset-allocation strategy. B) evaluating portfolio performance. C) developing an IPS. D) purchasing securities. | 
发表于 2008-5-26 16:31
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