\" G Qg TOPIC 10 REVIEW QUESTION: Case Study with 3 questions Having completed your degree at KOI, you are employed as an investment portfolio adviser. Dr John Mason and his wife have been referred to your firm and to you in particular. In an interview. with the Masons, you discover the following: 1. Dr Mason is an electrical engineer, a professor at the ABC University and an inventor. 2. He is aged 64 and plans to retire on his 65" birthday in December 2022. Both he and his wife are in good health and expect, subject to life's contingencies, to live to old age. 3. The Masons own their own home, valued at $1,500,000, and no debt. They have two sons and a daughter, all of whom are married and have their own families of primary school age. 4. Dr Mason has recently invented a new machine, for which he acquired a patent and sold it to the ACS Company for $1,000,000, which payment he has just received and banked. As part of the deal, if the invention is successful, ACS will pay Dr Mason royalties of $100,000 at the end of Page 10 of 12 this year, 2022, the expected first year of production, and thereafter, maximum royalties of $500,000 cach year for life. 5. Mrs. Mason points out that her husband has invested all his savings in his invention, and that his retirement pension from the University will be $60,000 a year, indexed for inflation. In retirement, he expects to continue carning $25,000 a year from consulting and speaking engagements for another 5 years. However, subject to Covid-19 restrictions, they would like to travel and are seeking an income of $120,000 a year in retirement, increasing annually by the inflation rate. She s concerned for the sound investment of the $1,000,000 initial payment. 6. 1 their funds permit, Dr and Mrs. Mason are interested in helping with the education of their 'grand-children costing $100,000 each year in total for the next 10 years, and have provided in their wills for their estate to be divided between their children and grandchildren. 7. In the event that the royalty payments from ACS meet the predictions stated above, the Masons are interested in providing a scholarship fund in the name of Dr Mason for the benefit of training enterprising young engineers attending the ABC University. However, the scholarship fund would not begin until the end of 2023 when the maximum royalties of $500,000 per annum are expected to start, and ranks third in priority behind the provision for the Masons\" retirement (first priority), and for the education of their grandchildren. 8. If the royalty payments and the expected speaking and consulting payments do not eventuate, the Masons could live in retirement on their indexed University pension starting at $60,000 a year, topped up by the income from the above $1,000,000 initial payment, but their other priorities may need to be curtailed. Question 1 In your discussions with Dr and Mrs. Mason, you have stressed the importance of identifying investment objectives and constraints and having an appropriate investment policy. Identify and describe an appropriate set of investment objectives and constraints for Dr and Mrs. Mason, and prepare a comprehensive investment policy statement based on these investment objectives and constraints. Question 2 Prepare a brief statement showing your recommended asset allocation (in whole number percentages for each asset class, viz., shares or common stock, bonds, real estate and money market securities) for each of: a. The $1,000,000 initial payment, currently banked; b, The expected royalty payment of $100,000 due at the end of 2022; and c. The expected royalty payments of $500,000 per annum due each year from the end of 2023 onwards. NOTES: o Each of the three sets of asset allocation percentages must total 100%. o Insome scenarios, property or real estate, either via a direct investment or through property trusts (or REITs - real estate investment trusts), may be included as assets. Also, with increased globalization and digitization, international shares, global fixed Interest and property are increasingly being included in the asset allocation. o Itis important that the asset allocation conforms to the investment style and risk profile of the investor. Broadly, this means asset allocation should be made along the broad lines of the following spreads. [Risk Tolerance Type of ercentage Invested in Risky Assels Percentage Invested in Risk-free /Low Risk| Investor [Shares and Property) ts (Cash and Bonds) [Eow risk Conservative % to 40% 00% t0 60% 11 Moderate risk Balanced 5% (0 65% 5% (0 35% |High Risk Aggressive 0% to 100% 10% to 0% Allocate above $1,000,000 initial payment: Asset Class Amount invested | E(R) % pa | E(R) $ pa_| Comments Cash Fixed Interest Australian Shares International Shares Real Estate Commodities (Gold, etc.) Total Page 11 0f 12 Allocate Royalties of $500,000 pa Asset Class Amount invested [ E(R) % pa [ E(R) $ pa_| Comments Cash Fixed Interest Australian Shares International Shares Real Estate Commodities (Gold, etc.) Total Question 3 What changes would you make for an investment of an inheritance of $2,000,000 and: a. The investor is aged 75 and in retirement? b, The investor is aged 25 and single, with a University degree and a full-time job? c. The investor is aged 55, working and owning a debi-free house, children left home? d. The investor is the Red Cross and the money is to be used in 7 years\" time? ANSWER, IN GENERAL TERMS, TO QUESTIONS 'The investment objectives of the Masons should be expressed in terms of return and risk. These return and risk preferences should be portrayed in terms of the Mason's preferences, their current financial status, and the stage in their life cycle. Investment Obiectives Return Requirement: Dr. Mason is nearing retirement. Therefore, the overriding objective is to provide the Masons with sufficient retirement income. This objective should be easily satisfied by investing the original $1,000,000 payment from ACS to provide a moderate current income level. \"This income, combined with Dr Mason's university pension benefits, will provide sufficient retirement income. Because of the large cash royalty payments from ACS (even after payment of any taxes), the Masons will have a large enough financial base to pursue their other objectives, specifically, for the grandchildren and for scholarships to the ABC University. These latter two in objectives suggest a portfolio seeking long-term capital appreciation. Therefore, the substantial size of the assets permits a growth-oriented posture with a secondary emphasis on current income. Common stocks and equity real estate provide growth opportunities, and the latter may also provide tax benefits, 12 Page 1} B, 2, e T % 4 Comment Highlight ~ Draw Text Fill & Sign More tools