BKM_Sol_Ch_21 - Chapter 21 Investors and the Investment...

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Chapter 21 - Investors and the Investment Process Chapter 21 Investors and the Investment Process 1. b. Purchasing power risk. 2. b. Organizing the management process itself. 3. d. All investors. 4. b. The level of the market. 5. a.Paying benefits to retired employees. 6. c.Determines most of the portfolio’s returns and volatility over time. 7. INVESTOR OBJECTIVES Return Requirement: Often, the return is stated in terms of minimum levels required to fund a specific liability or budget requirements as indicated by the Wood Museum Treasurer. The minimum returns to meet the budget requirements are: 2009 -- 12%; 2010 -- 13%; and 2011 -- 14%. The trustees have to clarify how capital gains should be treated relative to the budget. Risk Tolerance: the client’s willingness or ability to bear risk in the pursuit of specified return requirements. For Wood Museum, the tight budget position and the trustees’ fears of a financial crisis indicate a low tolerance for risk. INVESTOR CONSTRAINTS Liquidity Requirements: The client’s need for cash or cash availability from securities that can be sold quickly and without substantial price risk (concessions). Wood Museum’s liquidity needs are a significant factor given the budget considerations. Time Horizon: The client’s expected holding period, which is generally determined by such factors as the nature of the client’s liabilities, cash flow requirements or expectations. Investment managers also have an expectational time horizon, which is the distance into the future that the manager feels he can predict important financial variables, such as earnings and dividends, with reasonable accuracy. For Wood Museum, the immediacy of the budget requirements (1 to3 years) suggests a very short time horizon for at least a major portion of the portfolio. 21-1
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Chapter 21 - Investors and the Investment Process Tax Considerations: Wood Museum is tax exempt. Regulatory and Legal Considerations: In the case of an endowment fund, prudent- man factors must be considered as well as the legal structure of the fund and any state or federal regulation that might influence the management of the investment portfolio. Unique Needs and Circumstances: Particular conditions or requirements that reflect the discretion of the fund trustees. For example, social factors might be a concern of the Museum that the trustees want reflected in the types of investment deemed appropriate for the fund. 8. The most important area of change concerns taxes. Mrs. Atkins pays income tax, but the endowment fund will be free of taxes. INVESTOR OBJECTIVES Return Requirement: The fund should strive to provide a predictable stream of income growing in line with inflation. An initial income target of 5% of portfolio assets should enable the fund to support the hospital’s operating budget, while still favoring future growth. Risk Tolerance
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This note was uploaded on 08/25/2009 for the course FNCE 4330 taught by Professor Jianyang during the Spring '09 term at University of Colorado Denver.

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BKM_Sol_Ch_21 - Chapter 21 Investors and the Investment...

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