CASE STUDY Background You work as a wealth advisor with the LAGRANDEARCHE Private Bank. One of your client, Mr. SEGI is willing to review the
CASE STUDY
- Background
You work as a wealth advisor with the LAGRANDEARCHE Private Bank. One of your client, Mr. SEGI is willing to review the allocation of his overall portfolio.
Mr. SEGI is 40-year old, US resident, currently living with his family in Paris. He and his wife have both a well-paid job as engineers in an international firm. The SEGIs have 2 young children (resp. 8 and 10-year old).
He and his wife earn some sufficient incomes (coming essentially from salaries of $8,000 per month after-tax and charges) just to achieve their family standard of living and reimburse their mortgage loans on their residence. Thus, you will assume Mr. SEGIs saving rate to be currently negligible.
From the end of year 2025, the mortgage loans will be fully redeemed and the SEGIs will be able to make some additional investments for an annual amount of about $10,000.
The SEGIs investment portfolio currently amounts to $500,000 as of 2020, September 20th.
- Return objectives
During a meeting with you, Mr. SEGI states that he is now worrying about preparing the retirement for his wife and for himself, and about funding his future each of his 2 childrens university studies.
Based on a recent study about average current costs for scholarship for US students, Mr. SEGI estimates he will need to pay about $150,000 of tuitions of his 2 childrens tuitions fees in years 10,11.
Mr. SEGI wishes also to secure his family security and standard of living during retirement planned in 25 years and expects that his financial capital will be able to distribute sufficient incomes to replace the couples salaries.
To achieve this objective, you have determined that the SEGIs investment portfolio should to be worth a minimum of $2,000,000 at the beginning of the retirement period (at the end of year 2045).
- Risk tolerance
Mr. and Mrs. SEGI live in healthy conditions.
Their financial situation allows them to take some investment risks.
During the meeting with Mr. SEGI, you ensure that he is still willing to take risks on his investment portfolio for the long run to satisfy his investment objectives.
The questionnaire Mr. SEGI has completed during the meeting emphasized a risk aversion coefficient of 3 based on the LAGRANDEARCHEs internal methodology.
- Constraints
There is no constraint about near-term liquidity requirements as daily expenses and repayment of loans are covered by salaries and given that SEGIs have not short-term financial project.
In addition to the investment portfolio, the SEGIs also have some restricted cash ($250,000) intended to be an emergency reserve on a net 2%-yielding bank account.
- Taxes
The SEGIs are subject to Capital Gain and Income taxes at a rate of 15%.
CURRENT PORTFOLIO COMPOSITION
As of September 20th, 2020, Mr. SEGIs current allocation within his investment portfolio consists of:
| Asset Class | Portfolio Weight |
| US Large & Mid-Caps | 30% |
| UK Large-Caps | 15% |
| EUR Investment Grade Corporate Bonds | 20% |
| US REITS | 35% |
The SEGIs investment portfolio amounts to $500,000 as of September 20th, 2020.
QUESTIONS:
- Discuss about the appropriateness of the current portfolio relatively to Mr SEGIs return objectives you have identified during the meeting.
- Mr. SEGI gave you the following list of assets he would accept to invest in. Equity markets:
US Large & Mid-Caps Euro Large & Mid-Caps UK Large Caps Japanese Large Caps
Latin America Emerging markets
Fixed-income:
US Aggregate Bonds Euro Government Bonds
EUR Investment Grade Corporate Bonds European Direct Real Estate
Alternative asset classes:
Gold
US Real Estate Investment Trust (REITS)
In order to examine the possible benefits of including some of these asset classes in the clients portfolio, you decide to collect the necessary information for processing a new asset allocation on Mr SEGIs portfolio (please see the Excel file enclosed) from your Capital Market Analysis Department.
Determine the Strategic Asset Allocation you could recommend to Mr SEGI? Explain the main step in your approach.
- Before running the asset allocation optimizer, you want to make sure that the data about expected returns and risks are correct for each asset class.
The analyst who prepared the inputs told you that these forecasts have been processed using an historical approach over the last 5 years.
Choose one asset class among the following ones:
- Euro Large & Mid-Caps
- UK Large Cap Equities
- Japanese Large Cap Equity
Choose one appropriate Market Index for representing your selected asset class, and justify your choice.
Compute your own expected return and risk for the investment period, using a historical approach.
- During the interview Mr SEGI contemplated to reinvest a significant part of the portfolio into the Latin American emerging equity market which should offer an attractive return over the long-term.
Identify economic factors that are likely to influence positively and negatively the return of Latin America Emerging markets Equities asset class.
You could investigate about factors that could impact the Long-Term Growth of real GDP of two major Latina countries (e.g. Brazil and Mexico)
- Mr SEGI has heard that US stocks should be bearish on the near run and intend to reduce its exposure to this asset class. He asks your advice about which asset class you may recommend as a substitute for the near-run (for a 2-year period).
You believe that Japanese Large Cap Equities (you are authorized to choose another asset class among United Kingdom, Brazil & Mexico) could be a good candidate for the near run.
Explain whether such recommendation should be relevant.
In your answer, you are expected to perform a business cycle analysis for both USA and Japan (or UK, Brazil & Mexico).
AutoSum - Fill - Clear - Sort & Find & Filter Select Editing R S T IA! % Cut Calibri - 11 AN Wrap Text General HH E Copy - 4.0 .00 Cell 2 B I U $ % Insert Delete Format Merge & Center Conditional Format & .00 0 Format Painter Formatting as Table Styles Clipboard Font Alignment Number Styles Cells B1 foc ASSET ALLOCATION INPUTS A B C D E F G N H J L M O P TASSET ALLULATION INPUTS Correlation Matrix Latin America EUR Inv Grade Standard Euro Large & Mid- Us Large & Mid UK Large-Caps Japanese large European Direct Expected Return Deviation Asset Class Caps Gold Emerging Caps US Reits Corporate Real Estate markets Equity Bonds Euro Large & Mid-Caps 8.8% 13.5% Euro Large & Mid-Cap: 100.0% 70.0% 65.0% 45.0% 33.0% -10.0% -14.0% -14.0% 16.0% US Large & Mid-Caps 9.4% US Large & Mid-Caps 70.0% 67.0% % 42.0% -20.0% 25.0% -13% 2% UK Large-Caps 8.4% 13.0% UK Large-Caps 65.0% 67.0% 100.0% 38.0% 45.0% -15.0% 30.0% -12% 28% Japanese Large-caps 7.9% 14.6% Japanese Large-caps 45.0% 52.0% 38.0% 100.0% 33.0%. -10.0% 15% -2% Latin America Emerging markets Equity 11.8% 19.9% Latin America Emergi 33.0% 42.0% 45.0% 6% 33.0% 100.0% 13% 3% US Reits 4.9% 12.9% US Reits -10.07 -20.0% -15.0% -10.0% 25.0% 100.0% -25.0%. 62% 56% Gold 5.5% 17.0% Gold -14.0% 25.0% 30.0% 15.0%. 13.0% -25.0% 100.0% 20% 20% European Direct Real Estate 4.3% 10.5% European Direct Real Est -14.0% -13.0% -12% 6% 62% 100.0% 20% 72% EUR Inv Grade Corporate Bonds 4.9% 7.4% EUR Inv Grade Corporate E 16.0% 2% 28% -2% 3% 56% 20% 72% 100.0% US Aggregate Bonds 4.2% 5.7% US Aggregate Bonds 16.0% 20.0% 19.0% 10.0% 22.0% 43.0% 1.0% 45% 76% Euro Government Bonds 3.6% 5.3% Euro Government Bong 17% 14.0% 20% 17 10% 37% 37% 57% 67% Risk-Free Rate 22 0% US Aggregate Government Euro 13.2% 100.0% Bonds 17% 14.0% 20% 1% 25.0% Bonds 16.0% 20.0% 19.0% 10.07 22.0% 43.0% 1.0% 45% 76% 100.0% 56% 10% 37% 37% 57% 67% 56% 100.0% Corner Portfolios Points US Reits Euro Goter eat Gold 0 1 2 3 4 5 6 Std. Expected Deviatio Sharpe Return Ratio 11.8% 19.9% 0.492462 10.8% 14.7% 0.596215 10.2% 12.8% 0.638338 10.17 12.5% 0.642933 10.0% 12.4% 0.645902 0.716139 7.2% 7.0% 0.742436 6.3% 6.0% 0.727112 6.2% 5.9% 0.723729 5.6% 5.3% 0.686272 4.6% 4.7% 0.553413 4.7% 0.507233 4.3% 4.7% 0.491322 4.3%. 4.7% 0.488735 4.3% 4.7% 0.488145 4.3% 4.7% 0.484386 4.3% 4.7% 0.484386 3.9% 4.8% 0.382387 3.6% 5.3% 0.301887 Corner Portfolios Veights Points Eero Large Mid-Caps 0 0.00% 1 0.00% 2 20.55% 3 19.98% 4 19.58% 5 11.26% 6 10.77% 7 7 19.77% 8 8 19.50% 9 13.97% 10 4.52% 11 2.13% 12 1.43% 13 1.38% 14 1.46% % 15 2.15% 16 2.15% 17 0.00% 18 0.00% 8 9 10 11 12 13 14 15 16 17 18 US Large Mid-Caps 0.00% 42.38% 42.07% 41.44% 40.94% 30.83% 20.75% 8.59% 7.71% 5.47% 1.82% 0.78% 0.33% 0.21% 0.00% 0.00% 0.00% % 0.00% 0.00% UK Large- Caps 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.21% 1.29% 1.21% 1.16% 1.23% 0.00% 0.00% 0.00% 0.00% Japanese Large-caps 0.00% 0.00% 0.00% 0.00% 0.22% 4.97% 7.37% 5.55% 5.56% 6.22% 7.33% 7.54% 7.54% 7.53% 7.57% 7.70% 7.70% 0.00% 0.00% Latn America Energing 100.00% 57.62% 37.38% 36.42% 35.79% 21.43% 10.43% 3.96% 3.45% 2.16% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.93% 9.38% 16.35% 15.93% 10.687 2.43% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 5.01% 12.57% 12.59% 8.67% 2.11% 0.36% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% European Direct Real Estate 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% % EUH IST Grade Corporate D- 0.00% 0.00% 0.00% 2.17% 3.48% 28.58% 36.29% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% US Aggregate Bonds 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 33.22% 35.26% 35.63% 35.83% 35.78% 35.31% 35.30% 35.33% 35.48% 35.48% 41.77% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 17.20% 44.75% 52 13% 54.19% 54.43% 54.41% 54.68% 54.68% 58.23% 100.00% Activate Windows AutoSum - Fill - Clear - Sort & Find & Filter Select Editing R S T IA! % Cut Calibri - 11 AN Wrap Text General HH E Copy - 4.0 .00 Cell 2 B I U $ % Insert Delete Format Merge & Center Conditional Format & .00 0 Format Painter Formatting as Table Styles Clipboard Font Alignment Number Styles Cells B1 foc ASSET ALLOCATION INPUTS A B C D E F G N H J L M O P TASSET ALLULATION INPUTS Correlation Matrix Latin America EUR Inv Grade Standard Euro Large & Mid- Us Large & Mid UK Large-Caps Japanese large European Direct Expected Return Deviation Asset Class Caps Gold Emerging Caps US Reits Corporate Real Estate markets Equity Bonds Euro Large & Mid-Caps 8.8% 13.5% Euro Large & Mid-Cap: 100.0% 70.0% 65.0% 45.0% 33.0% -10.0% -14.0% -14.0% 16.0% US Large & Mid-Caps 9.4% US Large & Mid-Caps 70.0% 67.0% % 42.0% -20.0% 25.0% -13% 2% UK Large-Caps 8.4% 13.0% UK Large-Caps 65.0% 67.0% 100.0% 38.0% 45.0% -15.0% 30.0% -12% 28% Japanese Large-caps 7.9% 14.6% Japanese Large-caps 45.0% 52.0% 38.0% 100.0% 33.0%. -10.0% 15% -2% Latin America Emerging markets Equity 11.8% 19.9% Latin America Emergi 33.0% 42.0% 45.0% 6% 33.0% 100.0% 13% 3% US Reits 4.9% 12.9% US Reits -10.07 -20.0% -15.0% -10.0% 25.0% 100.0% -25.0%. 62% 56% Gold 5.5% 17.0% Gold -14.0% 25.0% 30.0% 15.0%. 13.0% -25.0% 100.0% 20% 20% European Direct Real Estate 4.3% 10.5% European Direct Real Est -14.0% -13.0% -12% 6% 62% 100.0% 20% 72% EUR Inv Grade Corporate Bonds 4.9% 7.4% EUR Inv Grade Corporate E 16.0% 2% 28% -2% 3% 56% 20% 72% 100.0% US Aggregate Bonds 4.2% 5.7% US Aggregate Bonds 16.0% 20.0% 19.0% 10.0% 22.0% 43.0% 1.0% 45% 76% Euro Government Bonds 3.6% 5.3% Euro Government Bong 17% 14.0% 20% 17 10% 37% 37% 57% 67% Risk-Free Rate 22 0% US Aggregate Government Euro 13.2% 100.0% Bonds 17% 14.0% 20% 1% 25.0% Bonds 16.0% 20.0% 19.0% 10.07 22.0% 43.0% 1.0% 45% 76% 100.0% 56% 10% 37% 37% 57% 67% 56% 100.0% Corner Portfolios Points US Reits Euro Goter eat Gold 0 1 2 3 4 5 6 Std. Expected Deviatio Sharpe Return Ratio 11.8% 19.9% 0.492462 10.8% 14.7% 0.596215 10.2% 12.8% 0.638338 10.17 12.5% 0.642933 10.0% 12.4% 0.645902 0.716139 7.2% 7.0% 0.742436 6.3% 6.0% 0.727112 6.2% 5.9% 0.723729 5.6% 5.3% 0.686272 4.6% 4.7% 0.553413 4.7% 0.507233 4.3% 4.7% 0.491322 4.3%. 4.7% 0.488735 4.3% 4.7% 0.488145 4.3% 4.7% 0.484386 4.3% 4.7% 0.484386 3.9% 4.8% 0.382387 3.6% 5.3% 0.301887 Corner Portfolios Veights Points Eero Large Mid-Caps 0 0.00% 1 0.00% 2 20.55% 3 19.98% 4 19.58% 5 11.26% 6 10.77% 7 7 19.77% 8 8 19.50% 9 13.97% 10 4.52% 11 2.13% 12 1.43% 13 1.38% 14 1.46% % 15 2.15% 16 2.15% 17 0.00% 18 0.00% 8 9 10 11 12 13 14 15 16 17 18 US Large Mid-Caps 0.00% 42.38% 42.07% 41.44% 40.94% 30.83% 20.75% 8.59% 7.71% 5.47% 1.82% 0.78% 0.33% 0.21% 0.00% 0.00% 0.00% % 0.00% 0.00% UK Large- Caps 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.21% 1.29% 1.21% 1.16% 1.23% 0.00% 0.00% 0.00% 0.00% Japanese Large-caps 0.00% 0.00% 0.00% 0.00% 0.22% 4.97% 7.37% 5.55% 5.56% 6.22% 7.33% 7.54% 7.54% 7.53% 7.57% 7.70% 7.70% 0.00% 0.00% Latn America Energing 100.00% 57.62% 37.38% 36.42% 35.79% 21.43% 10.43% 3.96% 3.45% 2.16% 0.00% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 2.93% 9.38% 16.35% 15.93% 10.687 2.43% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 5.01% 12.57% 12.59% 8.67% 2.11% 0.36% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% European Direct Real Estate 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% % EUH IST Grade Corporate D- 0.00% 0.00% 0.00% 2.17% 3.48% 28.58% 36.29% 0.00% 0.00% % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% US Aggregate Bonds 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 33.22% 35.26% 35.63% 35.83% 35.78% 35.31% 35.30% 35.33% 35.48% 35.48% 41.77% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 17.20% 44.75% 52 13% 54.19% 54.43% 54.41% 54.68% 54.68% 58.23% 100.00% Activate Windows
