ETHICS IN ACTION

Kurt Williams was about to open a new SEP IRA ac$-$

count and was interested in exploring various in$-$

vestment options. Although he had some ideas

about how to invest his money, Kurt thought it best to seek

the advice of a professional, so he made an appointment

with Keith Klingman, a financial advisor at James, Morgan,

and Edwards, LLC$.$

Prior to their first meeting, Kurt told Keith that he

preferred to keep his investments simple and wished to

allocate his money to only two funds. Also, he mentioned

that while he was willing to take on some risk to yield higher

returns, he was concerned about taking on too much risk

given the recent volatility in the markets. After their conver$-$

sation, Keith began to prepare for their first meeting.

Because Kurt was interested in investing his SEP IRA

money in only two funds, Keith decided to compile fig:

ures on the expected annual return and standard devia$-$

tion $($a measure of risk$)$ for a potential SEP IRA accountconsisting of different combinations of two funds. If $x$ and

$Y$ represent the annual returns for two different funds,

Keith knew he could represent the expected annual return

for any combination of funds as $,$ where $a_{?}$

is the fraction of funds Kurt will allocate to $x.$

Keith calculated the expected annual return using the

formula $.$

Keith knew that this formula would be true for all funds $x$

and $Y$ even if their performances were correlated. To find

the variance if the combined investment he calculated

$.$

Keith knew that the variance calculation assumed that

the two funds were independent, but he figured that the

formula was close enough even if the funds performances

were correlated, and he wanted to keep the presentation

to Kurt simple.

Keith presented a variety of combinations of funds

and allocations to Kurt. Because some equity funds de$-$

livered the best expected return, Keith advised Kurt to put

all his money in two equity funds $($funds that also gen$-$

erated higher brokerage fees$)$ rather than allocating any

money to a simple fixed income fund. Kurt was surprised

to see that even under various market conditions, all the

equity fund combinations seemed fairly safe in terms of

volatility as evidenced by the fairly low standard devia$-$

tions of the combined funds, and Keith assured him that

these scenarios were realistic.

Identify the ethical dilemma in this scenario.

$-$What are the undesirable consequences?

Propose an ethical solution that considers the welfare

of all stakeholders.