1. A. Collect his/her/their information which you need when you formulate your advice for him/her/them.
Bryson, a fifty years old trader has reached financial freedom and plans to retire earlier this year. $2,500,000 is his deposit and saving since he started to work. His daugher got married and found a job in bank industry. She is capable to meet her daily expense. As a grandfather, Bryson plans to deposit $24,000 per year for his grandson. It is known that Bryson's annual living expense is $36,000. In order to prevent any ermergency, he requests to have at least 4 months living expense on hand. The inflation rate is 2% and the tax rate for him is 30%.
B. Formulate and justify an investment policy statement setting forth the appropriate
guidelines within which future investment actions should take place
Fund invested: $2,500,000
Annual return request: $36,000 + $24,000 = $60,000
Thus, the required annual pretax return is $60,000 / ( 1 - 0.3 ) = $85,715
In this case, the required real pretax return= $85,715/$2,500,000=3.45%
Required nominal pretax return=3.45%+2%=5.45%
How to measure risk:
Absolute risk objective: Expected standard deviation
Relative risk objective: Tracking risk, which is the standard deviation of the differences between a portfolio's and the benchmark's total returns.
Investor's willingness to take risk:
Bryson retired and planned to enjoy life. He is clear that expected asset risk is generally positively correlated with expected asset return. His request return is average and his willingness to take risk is average as well. In detail, his expected standard deviation should be below 6%
a) Liquidity constraints: liquidity requirement is a need for cash in excess of new contributions (e.g., for pension plans and endowments) or savings (for individuals) at a specified point in time. In Bryson's case, the constraint is emergency fund which is $36,000...