Jane is a junior investment adviser of Vanda Capital and recently met with a high net worth
Question:
Jane is a junior investment adviser of Vanda Capital and recently met with a high net worth client, Sebastien, to prepare an investment policy statement. At the meeting, Sebastien does not reveal any quantifiable return and risk objectives and Jane was only able to cobble together the following notes in order to draft a client profile:
“Sebastien Vetermier is a 40-year-old tenured professor living in the United States, with investable assets of USD20 million. His annual salary for the coming year will be USD200,000 and is expected to increase at a rate of 3% per year. Tenure grants him permanent employment until the age of 70 and protects him from being fired without just cause. Of his investable assets, Sebastien needs about $2 million three months from now in order to make a charitable donation to help in the fight against infectious diseases. He is not a big spender but is concerned about the general increase in the prices of goods and services over time. Furthermore, Sebastien would like a portfolio that can be liquidated quickly and at fair value. He also wants the portfolio to be diversified, with fixed income-like asset classes contributing around 30% of his total (i.e., financial + human) capital.”
When Jane was conducting “due diligence”, she chanced upon a risk-free rate of 2% and the following formula on her colleague’s desk:Future value of growing annuity at the end of period t = [C/(r – g)][(1+r)t – (1+g)t], where C is the cash flow one period from now, r is the discount rate, g is the rate at which cash flows grow from period to period, and t is the number of periods.
Calculate and justify the dollar amount of Sebastien’s financial capital (i.e. investable assets) that should be invested in bonds.
Given your answer in part (b) and Sebastien’s other circumstances, recommendthe portfolio from Jane’s proposal that is most suitable for Sebastien and justify, for each asset class, why your recommendation is most appropriate. There is no need to draft an investment policy statement, and calculations, if needed, are minimal.
Managerial Accounting Tools for business decision making
ISBN: 978-1118096895
6th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso