It is now three years later. The portfolio is worth $12 million. Mr. Sanchez has decided to join a privately held international investment group specializing in global mineral extraction. He is now contemplating investing $5 million for a royalty interest in an Australian oil field. He expects that his return on this investment will approximate $1.5 million annually for 10 year. There is no information on the riskiness of the royalty payments.

Can the existing investment policy accommodate such an investment? If not, how should the policy be modified? Propose changes regarding risk, rate of return and constraints. (20 points)

What, if any, asset allocation revision would you recommend, if Mr. Sanchez makes the investment and if the expected royalty level materializes?

Low growth, low inflation (60% probability) Cash equivalents Domestic bonds Domestic stocks International stocks Equity real estate Precious metals Expected Annual Total Return Rapid growth, high inflation (20% probability) Cash equivalents Domestic bonds Domestic stocks International stocks Equity real estate Precious metals Depression/deflation (20% probability) Cash equivalents Domestic bonds Domestic stocks International stocks Equity real estate Precious metals 5% 11 15 11 8 0 10 -12 8 16 14 20 25 12 14 05 15 Expected Annual Yield in 3 27o ONDO 5% 8 0 10 12 4 3 7 0 26110 1.5 0 Expected Annual Standard Deviation. 3% 15 52222 12 3 17 20 22 7 15 3 13 24 27 7 12