Allocation below 25 percent would not satisfy the

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allocation below 25 percent would not satisfy the endowment fund return requirements. Bertocchi Oil and Gas Common Stock: 15% There is a single issuer concentration risk associated with the current allocation, and a 25 percent reduction ($100 million), which is the maximum reduction allowed by the donor, is required ($400 million − $100 million = $300 million remaining). Direct Real Estate: 10% Venture Capital: 10% The suggested allocations (point estimates) would allow the JU endowment fund to meet the 10 percent return requirement, calculated as follows: Asset Suggested Allocation Expected Return Weighted Return U.S. Money Market Fund 0.15 4.0% 0.60% Intermediate Global Bond Fund 0.20 5.0% 1.00% Global Equity Fund 0.30 10.0% 3.00% Bertocchi Common Stock 0.15 15.0% 2.25% Direct Real Estate 0.10 11.5% 1.15% Venture Capital 0.10 20.0% 2.00% Total 1.00 10.000% The allowable allocation ranges, taken in proper combination, would also be consistent with the 10 percent return requirement. 6. a. Overview. Fairfax is 58 years old and has seven years until a planned retirement. She has a fairly lavish lifestyle but few money worries. Her large salary pays all current expenses, and she has accumulated $2 million in cash equivalents from savings in previous years. Her health is excellent, and her health insurance coverage will continue after retirement and is employer paid. While Fairfax’s job is a high-level one, she is not well versed in investment matters and has had the good sense to connect with professional counsel to start planning for her investment future, a future that is complicated by ownership of a $10 million block of company stock that, while listed on the NYSE, pays no dividends and has a zero-cost basis for tax purposes. All salary, investment income (except interest on municipal bonds) and realized capital gains are taxed to Fairfax at a 35 percent rate; this tax rate and a 4 percent inflation rate are expected to continue into the future. Fairfax would accept a 3 percent real, after-tax return from the investment portfolio to be formed from her $2 million in savings (“the Savings Portfolio”) if that return could be obtained with only modest portfolio volatility (i.e., less than a 10 percent annual decline). She is described as being “conservative in all things.” 28-8
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Chapter 28 - Investment Policy and the Framework of the CFA Institute OBJECTIVES Return Requirement . Fairfax’s need for portfolio income begins seven years from now, at the date of retirement. The investment focus for her Savings Portfolio should be on growing the portfolio’s value in the interim in a way that provides protection against loss of purchasing power. Her 3% real, after-tax return preference implies a gross total return requirement of at least 10.8%, assuming her investments are fully taxable (as is the case now) and assuming 4% inflation and a 35 percent tax rate. For Fairfax to maintain her current lifestyle, then, at retirement, she would have to generate inflation-adjusted annual income of: $500,000 × 1.04 7 = $658,000 If the market value of Reston’s stock does not change, and if she is able to earn a 10.8% return on the Savings Portfolio (or 7% nominal after-tax return), then, by
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