Question 1

Tan, age 55 and Ooi, age 52 are married couple live in Klang Valley. Tan is a construction contractor and Ooi is a bank officer. They have two children, age 18 and 20. The family lives a modest lifestyle. To facilitate ease of travelling to work for Ooi, the couple rent a house in Kuala Lumpur, while they usually go back to live in the house that they purchased in Port Klang during weekends. They are devoted to offering education for their children, at least to allow the children to complete a university degree. As COVID-19 strikes and the several rounds of lockdowns in the country, in addition to the increasing costs for building materials, Tans business is badly affected. He is forced to close-down some of the offices and cut wages to keep the workers. Tan sees that, although he enjoys his profession, he finds that he is less likely able to maintain his business. Ooi would like to retire in five years. Both would love to go around the world for vacation especially Europe and Canada after retired. However, moneys are not in place to provide for this goal. Oois parents are in 80s and staying in a bungalow owned by Oois father who has no outstanding debt. Ooi has no siblings.

A further financial diagnostic for Tan and Ooi revealed that they have total assets worth of RM1,000,000. 50% of the amount makes up of foreign stocks. At present, the portfolio has a large concentration in small-capitalization China equities. Over the past five years, the portfolio has averaged 15% annual total return on investment. The total household debts amounted to RM300,000. Their total household income before COVID-19 has been more than sufficient to meet their expenses. However, with an economy slow down lately, their present lifestyle can no longer generate any excess for savings. Tan & Ooi expect 20% average return from their investment and rate their risk aversion as 7 points of 10. Both the income and realized capital gains are taxed at a 30% rate. The current annual inflation rate of 4% are expected to continue after their retirement. Their primary concern is to maintain a stronger retirement fund and to pay off the outstanding debt. Both Tan and Ooi are in good health and covered by medical insurance. She has sought professional advice to begin planning for her investment future.

Required

(a) Prepare a written investment policy statement for Tan and Ooi in view of the current economic condition. You are required to explain and justify your answers. The following are to be discussed. The familys:

willingness and ability to accept risk, (above average or below average)

tax and liquidity constraints, (significant or insignificant)

time horizon,

return objective and (above average or below average)

risk tolerance. (above average or below average)

(20 marks)

(b) Suggest and advise Tan and Ooi on their portfolio objective, retirement funding and retirement asset allocation strategy.

(c) A risk-loving or risk seeking investor would have a utility function that is convex. Discuss the statement in the context of Tan and Ooi.