1. Develop an IPS for the following client with the relevant information requested below. Ashley (38) and John (40) Anderson live in West Fargo. Ashley stays home to care for their newbom twins. She recently inherited $700.000 (after taxes) in cash from her father's estate. John carns an annual salary of $120,000 before taxes. In addition, they have accumulated the following assets (current market values): $10,000 in cash $170,000 in stocks and bonds $250,000 in common stock at work. They need $30,000 for a down payment on the purchase of a house and plan to make a $30,000 nontax-deductible donation to a local charity. Their annual living expenses are $75,000. After-tax-salary increases will offset any future increases in their living expenses. Addition savings net of expenses will be invested. They also want to achieve their educational goals for their children and their own retirement goals total of $2,000,000. They want to have sufficient funds to retire in 15 years, when their children beginning their four years of college education. They express that they do not want to experience a loss in portfolio value greater than 15 percent in any one year. Their income is taxes at 30%. a. Formulate the risk objective. b. Formulate the return objective. Calculate the pre-tax rate of retum that is required to achieve this objective. Show your calculations. c. Formulate the constraints portion. i. Time horizon ii. Liquidity requirements iii. Tax concerns iv. Other circumstances d. Asset Allocation - create a strategic asset allocation for the Andersons. You can use the table below for reference if you need. Explicitly provide asset allocation for the Andersons. You can use the information provided below but you are free to develop your asset allocation. Justify vour recommendation discussing portfolio characteristics and capital market assumptions. Use the following table to answer questions below: a. Using the fundamental law of active portfolio management discuss the factors that determine information ratio. Calculate the information ratio and information coefficient for ABC and XYZ. How would you use these metrics to assess the quality of active management? Also compare and. contrast information ratio and its usefulness to Sharpe ratio, Treynor ratio, and Jensen's alpha (conceptually). b. How can you use factor-based method for portfolio performance analysis? Discuss factor exposures of each fund above. What style each fund is pursuing and why? The intercept is not given but what is a desirable intercept and why? 3. Provide your answers to the following questions about Ethical and Professional Standards. a. John, a portfolio manager for an investment advisory firm, is planning to sell a portion of his portfolio. He wants to sell his holdings in XYZ stock, but his firm recently upgraded the stock to "strong buy." Will he violate the Code and Standards if he sells the stock, and why? b. Mary works for a regional brokerage firm. She estimates that ABC firm will increase its dividends next year but this increase is contingent on pending legislation. The legislator from her district told her that he is making efforts to pass the legislation but some members of legislative body are not so willing. The company hasn't made any announcements about a change in dividend policy. Mary write in her report: "We expect ABC stock price to rise by at least $10 by the end of the year because of the dividend increase. Investors buying the stock now should expect to realize a total return of at least 15% on the stock." Did Mary violate the Code and Standards in this report, and why? c. Andy is an analyst at Fargo brokerage and investment banking firm that works with Moorhead Inc. Andy is writing a research report on Moorhead Inc. Two of the Fargo's senior managers are directors at Moorhead's subsidiaries. Should Andy write a research report on Moorhead? If no, why, and yes, how can he make sure that his actions comply with the Code and Standards. d. Louis Perkorski manages a high-income mutual fund. He purchases zero-dividend stock in a financial services company because he believes the stock is undervalued and is in a potential growth industry, which makes it an attractive investment. Is Louis violating the CFA Code of Ethics and Standards of Conduct, and why? e. Caleb Smith, an investment adviser, has two clients: Larry Robertson, 60 years old, and Gabriel Lanai, 40 years old. Both clients earn roughly the same salary, but Robertson has a much higher risk tolerance because he has a large asset base. Robertson is willing to invest part of his assets very aggressively; Lanai wants only to achieve a steady rate of return with low volatility to pay for his children's education. Smith recommends investing 20% of both portfolios in zero-yield, small-cap, high-technology equity issues. Is Caleb violating the CFA Code of Ethics and Standards of Conduct, and why? 4. Discuss performance attribution analysis. What are the examples of allocation and selection decisions? How did your portfolio (group project) do on allocation and selection, and why? Use the following information to calculate performance attribution to allocation and selection for a hypothetical fund. (Please do not forget to switch the numbers to decimals before doing your calculations. Otherwise, your numbers may look too large.) Discuss your findings. Provide your answers to these questions: Part 1: Using the Taylor rule and the following information estimate short-term interest rate level to be used by the monetary policymakers. Also explain why the monetary action suggested by the Taylor rule output may not be actually taken. by the policymakers. Should the FED use Taylor rule now and what monetary policy actions this rule would suggest now? Part 2: A. Discuss interest rate and reinvestment rate risk. How can bond portfolio manager use duration to manage interest rate risk? How does convexity help a bond investor and given the current yield curves would you prefer more or less convex bond? B. Discuss barbell, laddered and bullet bond portfolios. Discuss current yield curve and your expectations about how the curve may change (flatten, steepen, shift upward-downward etc.). Which bond portfolio would you like to hold then, and why? 6. JP Morgan's most recent Guide to Markets: Take alook at the following slides: 6,10 , and 12. Discuss your observations and their implications for portfolio management. How can you use this information in the future for portfolio construction for a prospective client? P/E ratios and equity returns Value vs. Growth LPMorgan Value is. Grewith retative valuecons. Returns and valuations by style 7. Asset Allocation problem The Bison Research Foundation has $40 million cash gift donated recently. The foundation's spending policy pays out about 5% of the market value. While supporting research is primary goal, the investment committee understands that preserving the real value of the foundation's assets is equally important in order to preserve its future support. Considering your group portfolio capital market expectations, recommend and justify a long-term asset allocation using the following table: Please make sure you discuss the rationale and reasoning/model you used to estimate your forecast of returns and asset allocation. Would you use any optimization methods and why do you think your answer is an optimal allocation