1. You are an investment adviser. Your client, Alice, is a wealthy friend who has just received an inheritance of $3,250,000. She wishes to place $A250,000 in the bank as “spending money” and to invest the remaining $A3,000,000 for a period of up to 10 years, with all investment earnings reinvested to maximize the growth of her investment balance.

In an interview with her, you discover that she is age 24 years, single, has graduated in law and after working the next 2 years for a lawyer, she wishes to set up her own practice.

You also discover that at this stage of life she is strongly career oriented. She will rent an apartment for the next 10 years, then hopes to marry, buy a house and raise a family.

You ask: What is Alice’s investment objective or goal? She seeks an average annual return (income plus capital gain) from a spread of her investments across a range of securities equal to the CPI (the rate of inflation, estimated at between 2% to 3% per annum) plus a further 2% p.a. (that is, a total compound return of 4% to 5% pa). She hopes this would enable her $3,000,000 initial investment to increase in value by 50% at the end of 10 years.

You assess her risk profile as a balanced investor. That is, she is a moderately risk taker when choosing investments, by mixing a base of defensive or relatively risk-free assets (that is, 35% - 50% of her portfolio to be invested in cash, bank deposits or cash equivalents, fixed interest government bonds and high-quality company debentures), with a selection of high quality growth or risky assets (the other 65% - 50% of her portfolio to be invested in equities or shares, and / or real estate including property trusts or REITs – real estate investment trusts, and/or valuable commodities, e.g., gold) in the quest for higher returns.

REQUIRED:

Show in the table below, in the current investment climate, how you would invest the

$A3,000,000, specifying (in whole numbers) the amounts and percentages you would allocate to each selected asset class (e.g., “Cash, $300,000, 10%”, but you may alter the amounts of this allocation to Cash, if desired), and calculate the expected percentage annual return.

[NOTES:

1. All stated percentages in column (3) below must total 100%.
2. Only the asset classes – as shown in the table below – are required; NOT names of specific investments, such as BHP shares or NAB term deposit.
3. Assume that Alice will gain full-time employment and remain in Australia for at least the next 10 years.
4. Because Alice does not intend to withdraw any income or capital from the fund over the next 10 years, this will enable her portfolio to increase at a compound rate.
5. Ignore income tax and investment costs / expenses in your calculations.]

ANSWER: I would advise the client to invest the $3,000,000 as follows:

[**PLEASE COMPLETE TABLE BY INSERTING WHOLE NUMBERS IN COLUMNS (2), (3) AND (5), ALONGSIDE EACH ASSET CLASS; CHECK THAT ENTRIES IN COLUMNS (2) AND

(3) TOTAL $3,000,000 AND 100% RESPECTIVELY; CALCULATE FIGURES IN - AND SHOW TOTAL OF - COLUMN (5): AND CALCULATE % ANNUAL RETURN AT FOOT OF COL. (4).**]

ASSET CLASS – as designated below (1)	Amount to be Invested Now (To Total $3m.) (2)	Col. (2) as Percentage (%) of Total Invest’t (3)	Expected % Annual Return over 10 years (4)	Expected Initial $ amount of Annual Return (5) = (2) x (4)
Cash*Example only*	$300,000 *Change figures	(say) 10% >>>>>if desired	1%	$3,000
Bonds - Australia			2%
Equities - Australia			5%
Equities - Overseas			6%
Real Estate – Australia			4%
Gold & Commodities			3%
TOTALS	$3,000,000	100%	…………% = [Total Col. (5) /Total Col. (2)] x 100%	$

NOTES: In Columns (2), (3) and (5), zero is an acceptable allocation, if you choose not to invest in a particular asset class.

2. Briefly answer the following questions in relation to your completion of the Table in Part A. of the question?

1. Investor Objectives :
   1. State the overall compound annual return from your recommended portfolio. [This is the percentage number at the foot of Column (4)].
   2. Identify one risk attaching to each of the asset classes in Column (1).
   3. What percentage average annual return will Alice require to achieve on her overall investment portfolio if she seeks to increase her investible wealth of

$3,000,000 by 50%, viz., to $4,500,000 over the next 10 years?

2. Investor Constraint – liquidity requirement.

Do you envisage any circumstances arising whereby your client may require to cash some or all of her investment portfolio in the next 10 years? State two such circumstances or events which could cause her to cash some investments. What would be the effect on her investment goals?

3. Investment Spread – explain how your recommended asset allocation (the investment choices in the Table under Part A.) will help your client to achieve or align with her stated investment objectives.

4. Do you consider that bitcoin or other cryptocurrencies should be included in the investment portfolio of your client, having regard to her moderate risk tolerance? If so, what percentage of her portfolio should be the maximum you would recommend?

Answer rating: 100% (QA)

Answer Based on the information provided I would advise the client Alice to invest the 3000000 as follows ASSET CLASS 1 Amount to be Invested Now 2 Col 2 as Percentage of Total Investt 3 Expected Annu... View the full answer