Roger McDonald, 55 years old and single, is a dental surgeon and owns a dental practice. Roger has accumulated a SGD2,000,000 investment portfolio with a large concentration in small-cap Singapore equities. Over the last 5 years the portfolio has averaged 15 percent annual total return on investment. Roger does not expect to retire before he is 70 years old. His current income is more than sufficient to meet his expenses. Upon retirement, he plans to sell his medical practice and use the proceeds to purchase an annuity to cover his retirement cash flow needs. He has no additional long term goals or needs.
In consultation with Roger, his investment advisor, Justin Teo has drawn up an investment policy statement with the following elements (Justinâs notes justifying each item are included):
Risk tolerance: Roger has above average risk tolerance.
Justinâs notes:
- Rogerâs present investment portfolio and his desire for larger returns indicate a high willingness to take risk.
- His financial situation (largely current asset base, has ample income to cover expenses, lack of need for liquidity or cashflow, and long time horizon) indicates a high ability to assume risk.
Return Objective: The return objective is an average total return of 10 per cent or more with a focus on long-term capital appreciation.
Justinâs notes:
- Rogerâs circumstances warrant an above-average return objective that emphasizes capital appreciation for the following reasons:
- Roger has a sizable assert base and ample income to cover his current spending; therefore, the focus should be on growing the portfolio.
- Rogerâs low liquidity needs and long time horizon support an emphasis on a long term capital appreciation approach.
- Roger does not rely on the portfolio to meet living expenses.
-The numerical objective of 10 per cent represents an estimate of a target Roger can aim for rather than a minimum return required to meet a specific financial goal.

Liquidity: Rogerâs liquidity needs are low.
Justinâs notes:
- Roger has no regular cash flow needs from the portfolio, because the income from his medical practice meets all current spending needs.
- No large, one-time cash needs are stated. However, it could be considered appropriate to keep a small cash reserve for emergencies.
Time Horizon: Rogerâs time horizon is long term and consists of 2 stages:
(1) The first stage consists of the time until his retirement, which he expects to be 15 years.
(2) The second consists of his lifetime following retirement, which could range
from 10 to 20 years. Justin has also summarised Rogerâs current portfolio in Exhibit 1 below:
Value Total Return Deviation
Short-term Bonds $200,000 10% 4.6% 1.6%
Domestic Large-Cap Equities $600,000 30% 12.4% 19.5%
Domestic Small-Cap $1,200,000 60% 16.0% 29.9%
Total Portfolio $2,000,000 100% 13.8% 23.1%
Exhibit 1: Rogerâs Current Investment Portfolio

Roger expects to receive an inheritance of SGD2,000,000 soon. Roger and Justin sit down to discuss its investment in one of the four index funds. Given Rogerâs already above average risk tolerance and level of portfolio risk, Roger and Justin have concluded that the risk tolerance description in the current IPS remains valid; they do not want to contemplate further increase in portfolio risk. On the other hand, they do not wish to reduce expected return. Justin is evaluating the four index funds shown in Exhibit 2 below for their ability to produce a portfolio that will meet the following two criteria relative to the current portfolio:
- Maintain or enhance expected return, and
- Maintain or reduce volatility.

Each Fund in Exhibit 2 is invested in an asset class that is not substantially represented in the current portfolio shown in Exhibit 1. Exhibit 2 presents statistics on those index
funds.
Expected Expected Correlation of
Index Annual Annual Standard Returns with Current
Fund Return Deviation Portfolioâs Return
Fund A 15% 25% +0.80
Fund B 11% 22% +0.60
Fund C 16% 25% +0.90
Fund D 14% 22% +0.65
Exhibit 2: Expected Risk, Return and Correlation of 4 Index Funds under Consideration

Question 1
(a) Recommend the most appropriate index fund to add to Rogerâs portfolio. Justify your recommendations by describing how your chosen fund best meets both of the stated criteria. (No calculations are required.)

(b) Twenty years later, Roger is meeting with you, his new financial advisor. You are evaluating if Rogerâs investment policy remains appropriate for his changed circumstances.
- Roger is now 75 years old and retired. His spending requirements are expected to increase with the rate of general inflation, which is expected to average 3.0 per cent annually.
- Roger estimates his current living expenses at SGD150,000 annually. An annuity, purchased with the proceeds from the sale of his medical practice, provides SGD20,000 of this amount. The annuity is adjusted for inflation annually using a national price index.
- Because of poor investment performance and a high level of spending, Rogerâs asset base has declined to SGD1,200,000 exclusive of the value of the annuity.
- Roger sold all of his small-cap investment last year and invested the proceeds in domestic bonds.
- Because his international equity investments have performed poorly, Roger has become markedly uncomfortable holding international equities.
-Roger plans to donate SGD60,000 to a charity in three months.

Discuss how each of the following components of Rogerâs investment policy statement should now reflect the changes in his (note that the observations should focus on but not limited to the direction and magnitude of change in each component rather than on a specific numeric change):
(i) Risk tolerance
(ii) Return requirement
(iii) Liquidity needs
(iv) Time horizon

(c) Rogerâs investment portfolio at 75 years old is summarised in Exhibit 3 below:
Current Expected Expected
Allocation Return Standard Deviation
Cash equivalents 2% 5% 3%
Fixed Income 75% 7% 8%
Domestic Equities 10% 10% 16%
International Equities 3% 12% 22%
Domestic Real Estate 10% 10% 17%
_______________________________________________________________
Exhibit 3: Rogerâs Investment Portfolio at Age 75 Years Old

Given Rogerâs changed circumstances, state whether the current allocation to each asset class should be lower, the same, or higher. Justify your response with one reason for each asset class. No calculations are required and responses should be based only on Rogerâs changed circumstances and the information in
Exhibit 3.
(i) Cash Equivalents
(ii) Fixed Income
(iii) Domestic Equities
(iv) International Equities
(v) Domestic Real Estate

(d) Explain one (1) way in which Roger might seek to reduce the tension between his current return requirement and his current risk tolerance.

orangewildebeest816

1.Which of the following statements about conversion of income is correct?

converting ordinary income into capital gain is a beneficial tax planning strategy

converting capital gain income into ordinary income is a beneficial tax planning strategy

converting qualifying dividends into interest income is a beneficial tax planning strategy

holding assets that will generate a capital gain inside a retirement plan is a beneficial tax planning strategy

2. Which of the following statements is NOT a true statement regarding long-term capital assets?

capital assets that are held for more than one year are treated as long-term

no distinction is made between capital losses and ordinary losses

with few exceptions, the maximum capital gains tax rate is 15%

the benefit of holding a capital asset long enough to garner long-term capital gain treatment must be weighed against the financial risk associated with a possible decline in value during the holding period

3. Which of the following statements about the taxation of dividends is correct?

all dividends are taxed at the same rate as applicable to capital gains

dividends paid by credit unions and mutual insurance companies qualify for the lower tax rate

qualifying dividends are taxed at a maximum 15% rate

d. there is no tax benefit to changing some of an individual's funds from a lower-yielding fixed income investment into a dividend-paying stock

4. Which of the following is an advantage of making an IRC Section 83(b) election with respect to restricted stock?

an 83(b) election can be made any time within the tax year of the transfer of shares from the company to the employee

if the stock is forfeited, the compensation recognized and the taxes paid are deductible as losses

any future appreciation would be taxed as capital gain instead of taxable compensation

d. the employee does not receive any cash at the time of the stock award to pay the tax on the compensation recognized under the election

5.The maximum alternative minimum tax rate for individuals is:

less than the maximum regular federal income tax rate for individuals

equal to the maximum regular federal income tax rate for individuals

greater than the maximum regular federal income tax rate for individuals

d. going to decrease each year by 1% until it reaches 20% in 2010

6. How is alternative minimum taxable income (AMTI) for individuals computed?

AMTI = taxable income + adjustments + preferences - exemptions

AMTI = taxable income - adjustments + preferences - exemptions

AMTI = taxable income +/- adjustments + preferences - exemption

d. AMTI = taxable income +/- adjustments - preferences - exemptions

7. Which of the following statements regarding the calculation of alternative minimum taxable income (AMTI) for corporations versus the calculation of AMTI for individuals is accurate?

	a.	AMTI is calculated the same for both corporations and individuals
	b.	an additional step is required for corporations based on their adjusted current earnings
	c.	the exemption amount for corporations is not subject to phaseout to phaseout while the exemption amounts for individuals are
	d.	thethere is no adjustments to taxable income for corporations, only preferences

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