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You are a portfolio manager. Phillip Fry is a new client who is 32 years old and has a stable




[A] You are a portfolio manager. Phillip Fry is a new client who is 32 years old and has a stable job where he earns $48,000 a year. He currently has $400 a month to invest.;[B] Phillip has friends who play the stock market and are always telling him how much money they make. Phillip therefore expresses that he would like returns of 25% per year.;[C] His only use for the portfolio is to fund his retirement, which he would like to begin at age 65.There is the possibility that he may withdraw some money from the portfolio in a few years to make a down payment on a house.;[D] Phillip closely follows markets and the economy, and believes that his portfolio holdings should change if his predictions about the market change.;[E] You determine that Phillip needs $500,000 to fund his retirement. Investing $400 a month, he will need a nominal after-tax return of 6% per year.;[F] Phillip has expressed that he doesn?t like the idea of volatility in his investments, or the idea of losing money in any given year.;[G] However, high volatility would not substantially affect his chances of reaching the end goal, Phillip has no liabilities, and he could contribute more per month or postpone retirement if necessary.;[H] You explain to Phillip that he needs to accept some volatility in order to produce the returns that he wants and needs. Together, you decide to create a portfolio such that the loss in any one year will not exceed 10% of the portfolio value.;[I] Taking all the facts above into consideration, you and Phillip agree to create a portfolio with an expected nominal after-tax return of 7.5% per year.;[J] You believe that the target weights for Phillip?s portfolio should be 60% stocks and 40% bonds in order to match his objectives and constraints.;[K] In constructing the portfolio, Phillip pays $300 to you and $100 in broker commissions.;[L] You and Phillip agree to meet annually to review the portfolio and market conditions, make sure the portfolio remains at its target weights, and evaluate the return.;Answer these questions. For questions that ask ?Which statement,? you may identify the statement by its letter, A through L. All answers require explanations.;0. Example Question;a. Which statement describes the feedback step of the portfolio management process? Explain.;Answer: L. The feedback step consists of monitoring, rebalancing, and performance evaluation.;b. Why might a portfolio need to be rebalanced?;Answer: As the value of the stock and bond holdings change, the portfolio may drift away from being 60% stocks and 40% bonds. Rebalancing will bring the percentages back to the target weights.;1. Risk;a. Which statement describes Phillip?s willingness to take risk? Explain.;A. He has the ability to save as he has distinguished how much he currently has to invest in the amount of $400.00.;b. Which statement describes Phillip?s ability to take risk? Explain.;J.;c. How would you describe Phillip?s risk tolerance?;I. The portfolio has flexibility because of the expected return of 7.5% annually.;d. Which statement describes the portfolio?s risk objective? Explain.;2. Return;a. Which statement describes Phillip?s stated return desire? Explain.;b. Which statement describes the required return? Explain.;c. Which statement describes the portfolio?s return objective? Explain.;d. What information would you need in order to express the return objective as a real measure rather than a nominal one?;e. Is the return objective in this scenario an absolute objective or a relative objective? Explain. Then, give an example of a return objective of the other type.;3. Constraints;a. What is Phillip?s time horizon?;b. Which statement includes a liquidity need? Explain.;c. What specific questions might you ask Phillip to identify if he has any other investment constraints (besides time horizon and liquidity needs)? Name and explain the constraints.;4. Other Considerations;a. Does Phillip seem to want you to follow a passive investment approach, or an active one? Which statement tells you so?;b. Which statement describes the strategic asset allocation? Explain.;c. The return of 7.5% (given in statement I) is described as after tax. If Phillip?s investment returns will be taxed at 20%, what is the equivalent pretax return? Show work.;III. Making Investment Plans;A. Steps in Investing;1. Step 1: Meet Investment Prerequisites;2. Step 2: Establish Investment Goals;3. Step 3: Adopt an Investment Plan;4. Step 4: Evaluate Investments;5. Step 5: Select Suitable Investments;6. Step 6: Construct a Diversified Portfolio;7. Step 7: Manage the Portfolio;Attachment Preview


Paper#29574 | Written in 18-Jul-2015

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