Inheritance 900000 barnett co common stock 220000

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Inheritance 900,000 Barnett Co. Common Stock 220,000 Stocks and Bonds 160,000 Cash 5,000 Subtotal £1,285,00 0 Less One-time Needs: Down Payment on House –30,000 Charitable Donation –20,000 Total Assets £1,235,00 0 Note: No inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary. 28-16
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Chapter 28 - Investment Policy and the Framework of the CFA Institute c.The Maclins’ investment policy statement should include the following constraints: i. Time horizon: The Maclins have a two-stage time horizon because of their changing cash flow and resource needs. The first stage is the next 18 years. The second stage begins with their retirement and the university education years for their children. ii. Liquidity requirements: The Maclins have one-time immediate expenses (£50,000) that include the deposit on the house they are purchasing and the charitable donation in honor of Louise’s father. iii. Tax concerns: The U.K. has a 40 percent marginal tax rate on both ordinary income and capital gains. Therefore there is no preference for investment returns from taxable dividends or interest over capital gains. Taxes will be a drag on investment performance because all expenditures will be after tax. iv. Unique circumstances: The large holding of the Barnett Co. common stock (representing 18 percent of the Maclins’ total portfolio) and the resulting lack of diversification is a key factor to be included in evaluating the risk of the Maclins’ portfolio and in the future management of the Maclins’ assets. The Maclins’ desire not to invest in alcohol and tobacco stocks is another constraining factor, especially in the selection of any future investment style or manager. 9. a.1. The cash reserve is too high. The 15 percent (or £185,250) cash allocation is not consistent with the liquidity constraint. The large allocation to a low-return asset contributes to a shortfall in return relative to required return. 2. The 15 percent allocation to Barnett Co. common stock is too high. The risk of holding a 15 percent position in Barnett stock, with a standard deviation of 48, is not appropriate for the Maclins’ below-average risk tolerance and –12 percent shortfall risk limitation. The large holding in Barnett stock is inconsistent with adequate portfolio diversification. 3. Shortfall risk exceeds the limitation of –12 percent return in any one year. The Maclins have stated that their shortfall risk limitation is –12 percent return in any one year. Subtracting 2 times the standard deviation from the portfolio’s expected return, we find: 6.70 percent – (2 × 12.40 percent) = –18.10 percent This is below their shortfall risk limitation. 4. The expected return is too low (the allocation between stocks and bonds is not consistent with return objective).
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