Chap022 - Chapter 22 Investors and The Investment Process...

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Chapter 22 - Investors and The Investment Process CHAPTER 22 INVESTORS AND THE INVESTMENT PROCESS 1. 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 OBJECTIVES 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 the Masons’ Social Security and pension benefits, will provide sufficient retirement income. Because of the large cash payment from ACS (even after payment of capital gains taxes), the Masons will have a large enough financial base to pursue their other objectives, specifically, for the grandchildren and for scholarships to the Essex Institute. These latter two 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. Risk Tolerance : Given the substantial size of the Masons’ assets, this portfolio can tolerate a larger amount of risk than is normal for a family in the later stage of their life cycle. Coupled with the Masons’ retirement benefits, a moderate income from the portfolio will provide sufficient retirement income. Therefore, the portfolio can accept greater risk in the pursuit of higher long-term capital appreciation. A significant portion of the Masons’ assets can be invested in growth assets, such as common stocks and real estate, with secondary emphasis on investments with a high current income yield. The greater the amount of royalties received, the greater the risk-tolerance for the portfolio. INVESTMENT CONSTRAINTS Liquidity : The substantial size of the Masons’ assets and the prospects for continued high royalty income lessen the importance of the liquidity constraint. A major portion of the portfolio should be invested in relatively non-liquid assets in order to achieve long-term capital growth. Time Horizon : Because the Masons are in the later part of their life cycle, one would ordinarily expect them to have a relatively short time horizon. The size of the Masons’ assets, however, and the objectives of providing for the education of their grandchildren and for scholarships, dictate that a substantial portion of the portfolio be invested for the longer term. Common stocks and real estate would be appropriate.
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