Henri Gascon continues to discuss his investment requirements with the financial adviser. The financial adviser begins to draft the constraints section of the IPS.

Gascon expects that he will continue to work for the oil company and that his relatively high income will continue for the foreseeable future. Gascon and his wife do not plan to have any additional children, but expect that their son will go to a university at age 18. They expect that their son’s education costs can be met out of their salary income.

Gascon’s emergency reserve of h100,000 is considered to be sufficient as a reserve for unforeseen expenditures and emergencies. His retirement savings of h900,000 has been contributed to his defined-contribution pension plan account to fund his retirement.

Under French regulation, pension fund contributions are paid from gross income

(i.e., income prior to deduction of tax) and pension fund returns are exempt from tax, but pension payments from a fund to retirees are taxed as income to the retiree.

With respect to Gascon’s retirement savings portfolio, refer back to Example 7-2 as needed and address the following:

1. As concerns liquidity, A. A maximum of 50 percent of the portfolio should be invested in liquid assets.

B. The portfolio should be invested entirely in liquid assets because of high spending needs.

C. The portfolio has no need for liquidity because there are no short-term spending requirements.

2. The investment time horizon is closest to A. 5 years.

B. 20 years.

C. 40 years.

3. As concerns taxation, the portfolio A. Should emphasize capital gains because income is taxable.

B. Should emphasize income because capital gains are taxable.

C. Is tax exempt and thus indifferent between income and capital gains.

4. The principle legal and regulatory factors applying to the portfolio are A. U.S. Securities laws.

B. European banking laws.

C. French pension fund regulations.

5. As concerns unique needs, the portfolio should A. Have a high weighting in oil and other commodity stocks.

B. Be invested only in responsible and sustainable investments.

C. Not have significant exposure to oil and other commodity stocks.

Example 7-2

Henri Gascon is an energy trader who works for a major French oil company based in Paris. He is 30 years old and married with one son, aged five. Gascon has decided that it is time to review his financial situation and consults a financial adviser. The financial adviser notes the following aspects of Gascon’s situation:

Based only on the information given, which of the following statements is most accurate?
A. Gascon has a low ability to take risk, but a high willingness to take risk.
B. Gascon has a high ability to take risk, but a low willingness to take risk.
C. Gascon has a high ability to take risk, and a high willingness to take risk.

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Gascon's annual salary of 250,000 is more than sufficient to cover the family's outgoings. Gascon owns his apartment outright and has 1,000,000 of savings.