James Stephenson, age 55 and single, is a surgeon who has accumulated a substantial investment portfolio without a clear long-term strategy in mind. Two of his patients who work in financial markets comment as follows:
James Hrdina: "My investment firm, based on its experience with investors, has standard investment policy statements in five categories. You would be better served to adopt one of these standard policy statements instead of spending time developing a policy based on your individual circumstances."
Charles Gionta: "Developing a long-term policy can be unwise given the fluctuations of the market. You want your investment advisor to react continuously to changing conditions and not be limited by a set policy."
Stephenson hires a financial advisor, Caroline Coppa. At their initial meeting, Coppa compiles the following notes: Stephenson currently has a $2.0 million portfolio that has a large con - centration in small-capitalization US equities. Over the past five years, the portfolio has averaged 20 percent annual total return on investment. Stephenson hopes that, over the long term, his portfolio will continue to earn 20 percent annually. When asked about his risk tolerance, he described it as "average." He was surprised when informed that US small-cap portfolios have experienced extremely high volatility. He does not expect to retire before age 70. His current income is more than sufficient to meet his expenses. Upon retirement, he plans to sell his surgical practice and use the proceeds to purchase an annuity to cover his post-retirement cash flow needs. Both his income and realized capital gains are taxed at a 30 percent rate. No pertinent legal or regulatory issues apply. He has no pension or retirement plan but does have sufficient health insurance for post-retirement needs.
1. The comments about investment policy statements made by Stephenson's patients are BEST described as:
Hrdina Gionta
a. Correct Correct
b. Incorrect Correct
c. Incorrect Incorrect
2. In formulating the return objectives for Stephenson's investment policy statement, the MOST appropriate determining factor for Coppa to focus on is
a. Return desire
b. Ability to take risk
c. Return requirement
3. Stephenson's willingness and ability to take risk can be BEST characterized as :
Willingness Ability
a. Below Average Above average
b. Above Average Below Average
c. Above Average Above Average
4. Stevenson's Tax and Liquidity Constraints can BEST be described as:
Tax Constraint Liquidity Constraint
a. Significant Significant
b. Significant Insignificant
c. Insignificant Insignificant
5. Stevenson's return objective and risk tolerance are MOST appropriately described as:
Return Objective Risk Tolerance
a. Below Average Above Average
b. Above Average Below Average
c. Above Average Above Average