Question $1(20$ Marks$)$

Stephenson, and $55$ and single, is a surgeon. Stephenson has a $$2\mathrm{.}0$million investment portfolio that has a large concentration in small capitalization U$.$S equities. Over the past $5$ years, the portfolio has averaged $20\%$ annual total return on investment.

His newly hired financial adviser, Caroline Coppa, has complied the following notes from her meetings with Stephenson:

$$Stephenson hopes that, over the long term, his investment portfolio will continue to ear $20\%$ annually. For the remainder of this year; he would like to earn a return greater than the $5\%$ Yield to Maturity currently available from short$-$term government notes. When asked about his risk tolerance, he described it as average. He was surprised when informed that U$.$S small cap portfolio have historically experienced extremely high volatility$$

He does not expect to retire before age $70.$ His current income is more than sufficient to meet his expenses. Upon retirement, his plans to sell his surgical practice and use the proceeds to purchase an annuity to cover his post$-$retirement cash flow needs. He could not state any additional long$-$term goals or needs.

Both his income and realized capital gains are taxed at a $30\%,$ no pertinent legal or regulatory issues apply. He has no pension or retirement plan but does have sufficient health insurance for post$-$retirement needs.

Stephenson asks Coppa to draft an investment policy statement based on their initial meetings.

a$.$ Formulate the following elements of Stephenson$$s investment policy statement and justify your response for each element with two arguments:

i$.$ Return requirement $[4]$

ii$.$ Risk Tolerance $[4]$

b$.$ Formulate the following elements of Stephenson$$s investment policy statement and justify your response for each element with two arguments:

i$.$ Liquidity $[4]$

ii$.$ Time Horizon $[4]$