Memo Assignment

Background

You are an investment advisor and your clients, Marilyn and David, require your services. Marilyn and David are both 65 and are about to retire. They have no assets other than $1,600,000 in cash savings, and they have no debts. They wish to maintain their current lifestyle during their retirement years. Their current annual living expenses are $120,000. They have no children and they do not wish to bequeath any assets to charity (after their death). Marilyn and David are in excellent health and have a normal life expectancy. They are, however, concerned about the possibility of outliving their retirement income (i.e., longevity risk). They will rely entirely on their cash savings to support themselves financially during their retirement years. Furthermore, they have a strong aversion to risk.

Marilyn and David have decided to use their cash savings to purchase an annuity that will provide them with the necessary income to cover their living expenses over their retirement years. They initially consult with Ms. Sheila Young who is an investment advisor at Merrill Lynch about purchasing their desired annuity. Ms. Young is an experienced advisor and claims to be able to get Marilyn and David a much higher annual income than they require because she knows how to invest their savings in financial instruments that can yield at least 15% per year. This rate of return is well above the current and historical average return for U.S. stocks as measured by the S&P 500 index.

Marilyn and David want you to provide a second opinion of the analysis done by the Merrill Lynch advisor. Specifically, they want you to write a memo to Ms. Young that compares her alternative with your "second opinion" and highlights the risks and benefits of each alternative. They feel certain that Ms. Young is not giving due consideration to assumptions and variables that will impact their decision (e.g., market risk, the clients risk tolerance, life expectancy, among others), but they dont know how to articulate their concerns to her. Therefore, since you speak finance they would like you to prepare this memo on their behalf.

Assignment

Write a memo to Ms. Sheila Young containing the following information:

Provide a professional and financially sound critique where you identify the problem(s), if any, with her investment analysis.Conduct your own analysis where you address any problem(s) using appropriate methods (e.g., formulas, models, etc.) and assumptions that will help to identify the weaknesses in Ms. Young's approach.Recommend one or more specific, clearlyexplainedactions that: 1) address any problem(s) identified with Ms. Young's analysis, and 2) support your specific recommendation(s).

Grading and Instructions

The grade on this assignment will be equally divided (50/50) between the analytical quality of your argument (reasoning ability) and clarity of thought, correct use of grammar, punctuation, etc. (writing skills). Please note, simply providing numbers is insufficient to obtain a passing grade. Please provide your analysis in a clear and analytically sound memo that supports your final recommendations/conclusions. All supporting tables and graphs must be clearly presented and labeled.

The length of the BWAC assignment must not exceed 2 single-spaced type written pages.

Your grade on the BWAC assignment will count for 2 homework grades.