Jill just joined GBM Wealth Management (GBM), which provides investment advisory services to high-net-worth clients. She...

Transcribed Image Text:

Jill just joined GBM Wealth Management ("GBM"), which provides investment advisory services to high-net-worth clients. She is quite the go-getter, after having just concurrently completing her CFA Level II exam and graduating with an MBA from an Ivy League school in the United States. In fact, she firmly believes that indicating her CFA level and her expected year of completion of the program (in 2023, no less) in her LinkedIn profile was instrumental in helping her secure the Associate Vice President position at GBM. Prior to her MBA, Jill had a stint at FTX Private Bank ("FTX"), which was recently embroiled in an ethical scandal and has since exited its wealth management business. Jill decides to reach out to her former colleagues to join GBM and also contacts former clients to open new accounts with GBM. As a result, she has made a favourable first impression on her supervisor Jason, CFA, who has followed a long-standing practice of incentivising new recruits with commissions for bringing in their customers after they have tendered their resignations with their employers. On Jill's first day at work, she realises Jason has already scheduled her for a meeting with a prospective client, Dennis, who will only be in town for that weekend. Since she only has a short window of opportunity, even though Jill has not had a chance to meet with Dennis, she knows from her experience that customers tend to fall into one of five archetypes and, accordingly, puts together five portfolios with the intention to recommend one of these to Dennis when they meet. That weekend, Jill and Dennis meet over coffee. She learns that Dennis is a 57-year-old Senior Vice President at an engineering company, and he plans to retire when he turns 65. He is single with no immediate family, as he is the only child and both of his parents have passed on. His annual salary is $400,000, which his employer will protect from inflation, expected to be 4% per year. While his salary is sufficient to support his present lifestyle, he is unable to save as he spends pretty much all that he makes. Fortunately, he has inherited a sizeable estate from his parents, amounting to $3 million after estate taxes. Unfortunately, he has no background in investing and currently has all of that money sitting in a checking account with low yield, which he is unsatisfied with. For the remaining of his working years, he has expressed that he would like a real after-tax total annual return of 3%. He stays in a rented apartment, does not own any property, and is debt-free. Although Dennis' employer does not have a pension plan, Dennis has benefited from its stock bonus incentive plan over the years, accumulating around $8 million worth of his company's stocks. He does not expect his company to pay dividends and expects the stock value to remain relatively unchanged until his retirement, at which point he plans to sell off his entire holdings. The entire sales proceeds will be taxed at a rate of 35%, which is also the effective tax rate on his salary income and investment returns. After retirement, he would like to maintain his lifestyle and protect the value of his portfolio from inflation. Jill presents the following portfolios to Dennis for his consideration, noting that municipal bond returns are tax-free: Asset Class Cash equivalents Corporate bonds Municipal bonds Large cap US stocks Small and midcap US stocks International stocks Real estate investment trusts Venture capital Expected Standard Deviation Expected Expected Total Standard Portfolios C B D E 5.00% 10.00% Return Deviation A 4.00% 2.50% 10.00% 20.00% 25.00% 6.50% 11.00% 0.00% 25.00% 0.00% 40.00% 0.00% 30.00% 0.00% 0.00% 7.50% 10.80% 0.00% 30.00% 12.00% 17.00% 20.00% 15.00% 35.00% 25.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 10.00% 10.00% 10.00% 10.00% 25.00% 35.00% 5.00% 0.00% 10.00% 0.00% 15.00% 9.40% 12.40% 8.50% 18.10% 8.90% 21.00% 21.00% 9.00% 15.00% 22.00% 64.00% As Dennis had to leave for another appointment, Jill had to end the meeting prematurely without fully explaining the risk-return characteristics of the different asset classes, but she tells him that he can always email her if he has further questions. Also, some of the presented capital market expectations were solicited from fund managers that are part of the GBM Group, who pay their investment advisors higher commissions for recommending funds in the family to their clients. Jill does not share this with Dennis since funds in the GBM Group are generally acknowledged to be some of the very best in the market. However, Jill managed to recommend Portfolio A to Dennis, who agrees and asks her to make the recommended investments before leaving in a hurry. Question 2 (a) Calculate the expected real after-tax return for each of the five portfolios. (15 marks) Jill just joined GBM Wealth Management ("GBM"), which provides investment advisory services to high-net-worth clients. She is quite the go-getter, after having just concurrently completing her CFA Level II exam and graduating with an MBA from an Ivy League school in the United States. In fact, she firmly believes that indicating her CFA level and her expected year of completion of the program (in 2023, no less) in her LinkedIn profile was instrumental in helping her secure the Associate Vice President position at GBM. Prior to her MBA, Jill had a stint at FTX Private Bank ("FTX"), which was recently embroiled in an ethical scandal and has since exited its wealth management business. Jill decides to reach out to her former colleagues to join GBM and also contacts former clients to open new accounts with GBM. As a result, she has made a favourable first impression on her supervisor Jason, CFA, who has followed a long-standing practice of incentivising new recruits with commissions for bringing in their customers after they have tendered their resignations with their employers. On Jill's first day at work, she realises Jason has already scheduled her for a meeting with a prospective client, Dennis, who will only be in town for that weekend. Since she only has a short window of opportunity, even though Jill has not had a chance to meet with Dennis, she knows from her experience that customers tend to fall into one of five archetypes and, accordingly, puts together five portfolios with the intention to recommend one of these to Dennis when they meet. That weekend, Jill and Dennis meet over coffee. She learns that Dennis is a 57-year-old Senior Vice President at an engineering company, and he plans to retire when he turns 65. He is single with no immediate family, as he is the only child and both of his parents have passed on. His annual salary is $400,000, which his employer will protect from inflation, expected to be 4% per year. While his salary is sufficient to support his present lifestyle, he is unable to save as he spends pretty much all that he makes. Fortunately, he has inherited a sizeable estate from his parents, amounting to $3 million after estate taxes. Unfortunately, he has no background in investing and currently has all of that money sitting in a checking account with low yield, which he is unsatisfied with. For the remaining of his working years, he has expressed that he would like a real after-tax total annual return of 3%. He stays in a rented apartment, does not own any property, and is debt-free. Although Dennis' employer does not have a pension plan, Dennis has benefited from its stock bonus incentive plan over the years, accumulating around $8 million worth of his company's stocks. He does not expect his company to pay dividends and expects the stock value to remain relatively unchanged until his retirement, at which point he plans to sell off his entire holdings. The entire sales proceeds will be taxed at a rate of 35%, which is also the effective tax rate on his salary income and investment returns. After retirement, he would like to maintain his lifestyle and protect the value of his portfolio from inflation. Jill presents the following portfolios to Dennis for his consideration, noting that municipal bond returns are tax-free: Asset Class Cash equivalents Corporate bonds Municipal bonds Large cap US stocks Small and midcap US stocks International stocks Real estate investment trusts Venture capital Expected Standard Deviation Expected Expected Total Standard Portfolios C B D E 5.00% 10.00% Return Deviation A 4.00% 2.50% 10.00% 20.00% 25.00% 6.50% 11.00% 0.00% 25.00% 0.00% 40.00% 0.00% 30.00% 0.00% 0.00% 7.50% 10.80% 0.00% 30.00% 12.00% 17.00% 20.00% 15.00% 35.00% 25.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 10.00% 10.00% 10.00% 10.00% 25.00% 35.00% 5.00% 0.00% 10.00% 0.00% 15.00% 9.40% 12.40% 8.50% 18.10% 8.90% 21.00% 21.00% 9.00% 15.00% 22.00% 64.00% As Dennis had to leave for another appointment, Jill had to end the meeting prematurely without fully explaining the risk-return characteristics of the different asset classes, but she tells him that he can always email her if he has further questions. Also, some of the presented capital market expectations were solicited from fund managers that are part of the GBM Group, who pay their investment advisors higher commissions for recommending funds in the family to their clients. Jill does not share this with Dennis since funds in the GBM Group are generally acknowledged to be some of the very best in the market. However, Jill managed to recommend Portfolio A to Dennis, who agrees and asks her to make the recommended investments before leaving in a hurry. Question 2 (a) Calculate the expected real after-tax return for each of the five portfolios. (15 marks) Jill just joined GBM Wealth Management ("GBM"), which provides investment advisory services to high-net-worth clients. She is quite the go-getter, after having just concurrently completing her CFA Level II exam and graduating with an MBA from an Ivy League school in the United States. In fact, she firmly believes that indicating her CFA level and her expected year of completion of the program (in 2023, no less) in her LinkedIn profile was instrumental in helping her secure the Associate Vice President position at GBM. Prior to her MBA, Jill had a stint at FTX Private Bank ("FTX"), which was recently embroiled in an ethical scandal and has since exited its wealth management business. Jill decides to reach out to her former colleagues to join GBM and also contacts former clients to open new accounts with GBM. As a result, she has made a favourable first impression on her supervisor Jason, CFA, who has followed a long-standing practice of incentivising new recruits with commissions for bringing in their customers after they have tendered their resignations with their employers. On Jill's first day at work, she realises Jason has already scheduled her for a meeting with a prospective client, Dennis, who will only be in town for that weekend. Since she only has a short window of opportunity, even though Jill has not had a chance to meet with Dennis, she knows from her experience that customers tend to fall into one of five archetypes and, accordingly, puts together five portfolios with the intention to recommend one of these to Dennis when they meet. That weekend, Jill and Dennis meet over coffee. She learns that Dennis is a 57-year-old Senior Vice President at an engineering company, and he plans to retire when he turns 65. He is single with no immediate family, as he is the only child and both of his parents have passed on. His annual salary is $400,000, which his employer will protect from inflation, expected to be 4% per year. While his salary is sufficient to support his present lifestyle, he is unable to save as he spends pretty much all that he makes. Fortunately, he has inherited a sizeable estate from his parents, amounting to $3 million after estate taxes. Unfortunately, he has no background in investing and currently has all of that money sitting in a checking account with low yield, which he is unsatisfied with. For the remaining of his working years, he has expressed that he would like a real after-tax total annual return of 3%. He stays in a rented apartment, does not own any property, and is debt-free. Although Dennis' employer does not have a pension plan, Dennis has benefited from its stock bonus incentive plan over the years, accumulating around $8 million worth of his company's stocks. He does not expect his company to pay dividends and expects the stock value to remain relatively unchanged until his retirement, at which point he plans to sell off his entire holdings. The entire sales proceeds will be taxed at a rate of 35%, which is also the effective tax rate on his salary income and investment returns. After retirement, he would like to maintain his lifestyle and protect the value of his portfolio from inflation. Jill presents the following portfolios to Dennis for his consideration, noting that municipal bond returns are tax-free: Asset Class Cash equivalents Corporate bonds Municipal bonds Large cap US stocks Small and midcap US stocks International stocks Real estate investment trusts Venture capital Expected Standard Deviation Expected Expected Total Standard Portfolios C B D E 5.00% 10.00% Return Deviation A 4.00% 2.50% 10.00% 20.00% 25.00% 6.50% 11.00% 0.00% 25.00% 0.00% 40.00% 0.00% 30.00% 0.00% 0.00% 7.50% 10.80% 0.00% 30.00% 12.00% 17.00% 20.00% 15.00% 35.00% 25.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 10.00% 10.00% 10.00% 10.00% 25.00% 35.00% 5.00% 0.00% 10.00% 0.00% 15.00% 9.40% 12.40% 8.50% 18.10% 8.90% 21.00% 21.00% 9.00% 15.00% 22.00% 64.00% As Dennis had to leave for another appointment, Jill had to end the meeting prematurely without fully explaining the risk-return characteristics of the different asset classes, but she tells him that he can always email her if he has further questions. Also, some of the presented capital market expectations were solicited from fund managers that are part of the GBM Group, who pay their investment advisors higher commissions for recommending funds in the family to their clients. Jill does not share this with Dennis since funds in the GBM Group are generally acknowledged to be some of the very best in the market. However, Jill managed to recommend Portfolio A to Dennis, who agrees and asks her to make the recommended investments before leaving in a hurry. Question 2 (a) Calculate the expected real after-tax return for each of the five portfolios. (15 marks) Jill just joined GBM Wealth Management ("GBM"), which provides investment advisory services to high-net-worth clients. She is quite the go-getter, after having just concurrently completing her CFA Level II exam and graduating with an MBA from an Ivy League school in the United States. In fact, she firmly believes that indicating her CFA level and her expected year of completion of the program (in 2023, no less) in her LinkedIn profile was instrumental in helping her secure the Associate Vice President position at GBM. Prior to her MBA, Jill had a stint at FTX Private Bank ("FTX"), which was recently embroiled in an ethical scandal and has since exited its wealth management business. Jill decides to reach out to her former colleagues to join GBM and also contacts former clients to open new accounts with GBM. As a result, she has made a favourable first impression on her supervisor Jason, CFA, who has followed a long-standing practice of incentivising new recruits with commissions for bringing in their customers after they have tendered their resignations with their employers. On Jill's first day at work, she realises Jason has already scheduled her for a meeting with a prospective client, Dennis, who will only be in town for that weekend. Since she only has a short window of opportunity, even though Jill has not had a chance to meet with Dennis, she knows from her experience that customers tend to fall into one of five archetypes and, accordingly, puts together five portfolios with the intention to recommend one of these to Dennis when they meet. That weekend, Jill and Dennis meet over coffee. She learns that Dennis is a 57-year-old Senior Vice President at an engineering company, and he plans to retire when he turns 65. He is single with no immediate family, as he is the only child and both of his parents have passed on. His annual salary is $400,000, which his employer will protect from inflation, expected to be 4% per year. While his salary is sufficient to support his present lifestyle, he is unable to save as he spends pretty much all that he makes. Fortunately, he has inherited a sizeable estate from his parents, amounting to $3 million after estate taxes. Unfortunately, he has no background in investing and currently has all of that money sitting in a checking account with low yield, which he is unsatisfied with. For the remaining of his working years, he has expressed that he would like a real after-tax total annual return of 3%. He stays in a rented apartment, does not own any property, and is debt-free. Although Dennis' employer does not have a pension plan, Dennis has benefited from its stock bonus incentive plan over the years, accumulating around $8 million worth of his company's stocks. He does not expect his company to pay dividends and expects the stock value to remain relatively unchanged until his retirement, at which point he plans to sell off his entire holdings. The entire sales proceeds will be taxed at a rate of 35%, which is also the effective tax rate on his salary income and investment returns. After retirement, he would like to maintain his lifestyle and protect the value of his portfolio from inflation. Jill presents the following portfolios to Dennis for his consideration, noting that municipal bond returns are tax-free: Asset Class Cash equivalents Corporate bonds Municipal bonds Large cap US stocks Small and midcap US stocks International stocks Real estate investment trusts Venture capital Expected Standard Deviation Expected Expected Total Standard Portfolios C B D E 5.00% 10.00% Return Deviation A 4.00% 2.50% 10.00% 20.00% 25.00% 6.50% 11.00% 0.00% 25.00% 0.00% 40.00% 0.00% 30.00% 0.00% 0.00% 7.50% 10.80% 0.00% 30.00% 12.00% 17.00% 20.00% 15.00% 35.00% 25.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 5.00% 16.00% 10.00% 10.00% 0.00% 15.00% 10.00% 10.00% 10.00% 10.00% 25.00% 35.00% 5.00% 0.00% 10.00% 0.00% 15.00% 9.40% 12.40% 8.50% 18.10% 8.90% 21.00% 21.00% 9.00% 15.00% 22.00% 64.00% As Dennis had to leave for another appointment, Jill had to end the meeting prematurely without fully explaining the risk-return characteristics of the different asset classes, but she tells him that he can always email her if he has further questions. Also, some of the presented capital market expectations were solicited from fund managers that are part of the GBM Group, who pay their investment advisors higher commissions for recommending funds in the family to their clients. Jill does not share this with Dennis since funds in the GBM Group are generally acknowledged to be some of the very best in the market. However, Jill managed to recommend Portfolio A to Dennis, who agrees and asks her to make the recommended investments before leaving in a hurry. Question 2 (a) Calculate the expected real after-tax return for each of the five portfolios. (15 marks)

Answer rating: 100% (QA)

SOLUTION To calculate the expected real aftertax return for each portfolio we need to consider the expected total return and the tax implications Sinc... View the full answer