Christa estimates that her revised annual living expenses, including a new studio and apartment, will average ¤132,500 (excluding J¨urgen’s educational costs). If necessary, she could combine her apartment and studio to reduce spending by ¤32,500. She does not want her financial security to be dependent on further gifting from her parents and is pleased that, after the sale of IngerMarine, she will be able to meet her new living expenses with proceeds from art sales (¤50,000) and the expected total return of the proposed investment portfolio (¤82,500). Because of the uncertainty of art sales, Christa plans to establish an emergency reserve equal to one year’s living expenses. Her after-tax proceeds from the sale of IngerMarine are expected to be 1, 200, 000 × (1 − 0.15) = 1, 020, 000. She also holds ¤75,000 in balanced mutual funds and 25,000 in a money market fund. Christa intends to reevaluate her policy statement and asset allocation guidelines every three years.

1. Discuss Christa’s liquidity requirements.

2. Determine Christa’s return requirement and evaluate whether her portfolio can be

expected to satisfy that requirement if inflation averages 3 percent annually and she

reduces her annual living expenses to ¤100,000 by combining her apartment and studio.

3. Explain why an analysis of Christa’s IPS may be necessary before the three year review schedule.