Chapter 6: Q21_6I (page 711)
With no taxes or inflation (Spreadsheet 21.1), what would be your retirement annuity if you increase the savings rate by 1%?
Changing the retirement annuity from 15% to 16% can lead to retirement annuity to $205,260.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
You are a portfolio manager and senior executive vice president of Advisory Securities Selection, Inc. Your firm has been invited to meet with the trustees of the Wood Museum Endowment Funds. Wood Museum is a privately endowed charitable institution that is dependent on the investment return from a \(25 million endowment fund to balance the budget. The treasurer of the museum has recently completed the budget that indicates a need for cash flow of \)3 million in 2013, \(3.2 million in 2014, and \)3.5 million in 2015 from the endowment fund to balance the budget in those years. Currently, 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 businesspeople, and they have been critical of the fund’s previous investment advisers because they did not follow 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.
Advisory Securities Selection, Inc., has been contacted by the trustees because of its reputation for understanding and relating to the client’s needs. The trustees have asked you, as a prospective portfolio manager for the Wood Museum Endowment Fund, to prepare a written report in response to the following questions. Your report will be circulated to the trustees before the initial interview on June 15, 2013.
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 Wood Museum Endowment Fund.
a. Liquidity requirements.
b. Return requirements.
c. Risk tolerance.
d. Time horizon.
e. Tax considerations.
f. Regulatory and legal considerations.
g. Unique needs and circumstances.
1. Your client says, “With the unrealized gains in my portfolio, I have almost saved enough money for my daughter to go to college in eight years, but educational costs keep going up.” Based on this statement alone, which one of the following appears to be least important to your client’s investment policy? (LO 22-2)
a. Time horizon
b. Purchasing power risk
c. Liquidity
d. Taxes
Consider the following information:
r US = 5 5%
r UK = 5 7%
E0 = \(2 per pound
F0 = \)1.97/£ (one-year delivery)
where the interest rates are annual yields on U.S. or U.K. bills. Given this information:
a. Where would you lend?
b. Where would you borrow?
c. How could you arbitrage?
Evaluate the timing and selection abilities of the four managers whose performances areplotted in the following four scatter diagrams.
Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these funds and also charges its investors a 20% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds.
a. Compute the rate of return after incentive fees to an investor in the fund of funds.
b. Suppose that instead of buying shares in each of the three hedge funds, a stand-alone (SA) hedge fund purchases the same portfolio as the three underlying funds. The total value and composition of the SA fund is therefore identical to the one that would result from aggregating the three hedge funds. Consider an investor in the SA fund.
After paying 20% incentive fees, what would be the value of the investor’s portfolio at the end of the year?
c. Confirm that the investor’s rate of return in SA is higher than in FF by an amount equal to the extra layer of fees charged by the fund of funds.
d. Now suppose that the return on the portfolio held by hedge fund 3 were 2 30% rather than 1 30%. Recalculate your answers to parts ( a ) and ( b ). Will either FF or SA charge an incentive fee in this scenario? Why then does the investor in FF still do worse than the investor in SA?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
