24. Ambrose Green, 63, is a retired engineer and a client of Clayton Asset Management Associates ("Associates"). His accumulated savings are invested in Diversified Global Fund ("the Fund"). an in-house investment vehicle with multiple portfolio managers through which Associates manage nearly all client assets on a pooled basis. Dividend and capital gain distributions have produced an annual average return to Green of about 8% on his $900,000 original investment in the Fund, made six years ago. The $1,000,000 current value of his Fund interest represents virtually all of Green's net worth.

Green is a widower whose daughter is a single parent living with her young son. Although Green is not an extravagant person, his spending has exceeded his after-tax income by a considerable margin since his retirement. As a result, his non-Fund financial resources have steadily diminished and now amount to

$10,000. Green does not have retirement income from a private pension plan, but he does receive taxable government benefits of$I,OOOa month. His marginal tax rate is 40%. He lives comfortably in a rented apartment, travels extensively, and makes frequent cash gifts to his daughter and grandson, to whom he wants to leave an estate of at least $1,000,000.

Green realizes that he needs more income to maintain his lifestyle . He also believes his assets should provide an after-tax cash flow sufficient to meet his present

$80,000 annual spending needs, which he is unwilling to reduce. He is uncertain as to how to proceed and has engaged you, a CFAcharterholder with an independent advisory practice, to counsel him.

Your first task is to review Green's investment policy statement.

AMBROSE GREEN'S INVESTMENT POLICY STATEMENT Objectives

• "I need a maximum return that includes an income element large enough to meet my spending needs, so about a 10% total return is required."

• "I want low risk, to minimize the possibility of large losses and to preserve the value of my assets for eventual use by my daughter and grandson."

Constraints • With my spending needs averaging about $80,000 a year and only $10,000 of cash remaining, I will probably have to sell something soon."
• "1am in good health and my noncancelable health insurance will cover my future medical expenses."

a. Identify and briefly discuss four key constraints present in Green's situation not adequately treated iII his investment policy statement

b. On the basis of your assessment of his situation and the information presented in the Introduction, create and justify appropriate return and risk objectives for Green.