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You are a team of portfolio managers of Investment Advisory Services, Inc. Your firm has been invited


meet with the trustees of the Midlands Museum Endowment Fund. The Midlands Museum is a privately endowed charitable institution that is dependent on the investment return from a $25 billion endowment fund to balance the budget. The treasurer of the museum has recently completed a study that indicates a need for cash flows from the endowment fund of 3.0 billion in 2019, $3.2 billion in 2020, and 3.5 billion in 2021 in order to balance the budget. At the present time, the entire endowment portfolio is invested in Treasury bills and money market funds because the trustees fear a financial crisis. The trustees do not anticipate any further capital contributions to the fund. The trustees are all successful businessmen, and they have been critical of the fund's previous investment advisers for not following a logical decision-making process. In fact, several previous managers have been dismissed because of their inability to communicate with the trustees and their preoccupation with the fund's relative performance rather than the cash flow needs.

Investment Advisory Services, Inc., has been contacted by the trustees because of its reputation for understanding and relating to its clients' needs. The trustees have specifically asked to meet with you because of your recent article in a professional journal outlining the decision-making process of your firm. In the letter of invitation addressed to you, the trustees have included the flow chart in Exhibit A and the following quotations from a speech by Professor William Sharpe that were included in the article:

"It is important to understand that, even if the market were perfectly efficient with every security plotting right on the plane, the investment management process would still require sophisticated procedures. In particular, it would require the tailoring of portfolios to meet clients' attitudes toward risk and clients' attitudes toward yield vis-à-vis gains.

One important part of this exercise (modern portfolio theory) is finding out what the client is all about - where one client differs from another.

The Trustees have asked you, as a prospective portfolio manager for the Midlands Museum Endowment Fund, to compile a written report in response to the following questions. Your report will be circulated to the trustees prior to the initial interview on 30 April 2019.

Explain in detail how each of the following relates to the determination of either investor objectives or investor constraints that can be used to determine the portfolio policies for this three-year period for the Midlands Museum Endowment Fund also explain the processes in Exhibit A:

 Liquidity requirements

 Return requirements

 Risk tolerance

 Time horizon

 Tax considerations

 Regulatory and legal considerations

 unique needs and circumstances



Important Instructions: You should research from journal articles; books etc. and have at least three or four citations (or more) for each factor discussed. (Copy and paste from web sources is not acceptable)

Exhibit A the Portfolio Management Process

Identification and Specification of:

Investors' Objectives

Investors' Constraints

Expectational Factors

Regarding Economic Analysis,

Determination of Market Analysis, and

Portfolio Policies Individual Security Analysis

Integration of

Portfolio Policies and

Expectational Factors:

Asset Allocation

Investment Strategies


Monitoring the Portfolio

And Responding to Change



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