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Lecture 9

ADMS 4501 Lecture 9: Asset Allocation- Review Question 2 -SOLUTION

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Department
Administrative Studies
Course
ADMS 4501
Professor
Lois King
Semester
Winter

Description
Asset Allocation – Review Question 2 (Jessica) Solution: To obtain full marks your answer should discuss briefly most of the following points: Policy Statement aspect Jessica 1. Preliminaries Life insurance definitely needed as Jessica has 2 young a. Insurance children and a dead-beat ex-husband. Disability insurance also needed. Perhaps house insurance as she has no mortgage. b. Cash Reserves Short term investments should = at least 6 months expenses. Perhaps more if her new business takes a while to generate enough income. 2. Life Cycle Stage Between Accumulation and Consolidation a. Short-term goals She will need to generate income or dividend income on her portfolio as her expenses next year are greater than her estimated income. Protect her portfolio from inflation. b. Long-term goals Children’s education 3. Investment Objectives a. Risk Tolerance Moderate (to high) – Jessica has a very good nest egg, potentially high earnings and a long time until retirement. b. Return Requirements Total Return –capital appreciation (to offset inflation) and generate income next year. 4. Investment Constraints a. Liquidity Will need to generate $30,000 on $800,000 portfolio (3.75%), if she does not want to sell her house or draw
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