ii. Calculate the after-tax nominal rate of return that is required during
his first year of retirement. Show your calculations.
Note: Assume there are no tax benefits or tax liabilities related to Serra’s gifting
commercial real estate, or paying family support and living expenses.
B. i. Identify two factors in Serra’s personal situation that increase his ability
to take risk.
ii. Identify two factors in Serra’s personal situation that decrease his
ability to take risk.
iii. Judge, considering all factors, whether Serra has below-average,
average, or above-average ability to take risk.
Answer Question 1-B in the Template provided.
978-1-111-05434-2, Portfolio Construction, Management, and Protection, 5e, Robert A. Strong - © Cengage Learning
106 Part One Background, Basic Principles, and Investment Policy
C. Formulate each of the following constraints in Serra’s investment policy
i. Liquidity requirement
ii. Time horizon
Support each response with one reason based on Serra’s specific circumstances.
Answer Question 1-C in the Template provided.
D. Determine which one action taken by Serra best illustrates each of the following
i. Snake-bite effect
ii. House-money effect
iii. Trying-to-break-even effect
Conclude whether each psychological bias indicates Serra is more willing to
take risk, less willing to take risk, or has no effect on Serra’s willingness to
Answer Question 1-D in the Template provided.
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