Client No. 1

Mr. A. Smith is a 25 year old college graduate who holds a steady job as a valued employee in a blue chip company. In the few years that he has been working he has built up one ($1 m) cash reserves in the bank. He also has adequate insurance coverage. Mr Smith has a moderate to high risk profile depending on the type of investment. His current short term and long term goal is to acquire a house and car and build a long term retirement fund.

Client No 2.

Mr. B. Philips is 65 years of age and has just recently retired. He is in excellent health, pursues a simple but active lifestyle, and has two adult children. He has interest in a private company for $90 million and has decided that a medical research foundation will receive half the proceeds now and will be the primary beneficiary of his estate upon his death. Mr. Philips is committed to the foundation's well-being because he believes strongly that, through it, a cure will be found for the disease that killed his wife. He now realizes that an appropriate investment policy and asset allocations are required if his goals are to be met through investment of his considerable assets. Mr. Philips has a conservative to moderate risk preference. Currently, the following assets are available for use in building an appropriate portfolio for him:

$45.0 million cash (from sale of the private company interest, net of a $45 million gift to the foundation)

$10.0 million stocks and bonds ($5 million each)

$ 9.0 million warehouse property (now fully leased)

$ 1.0 million value of his residence

$65.0 million total available assets

Required:

a. Formulate and justify an investment policy statement for each investor setting forth the appropriate guidelines within which future investment actions should take place. Your policy statement should encompass all relevant objective and constraint considerations.

b. Recommend and justify a long-term asset allocation that is consistent with the investment policy statement you created in Part a. Briefly explain the key assumptions you made in generating your allocation.