QUESTION FIVE

James Phiri, age 55 and single, is a medical doctor who has accumulated a substantial investment portfolio without a clear long-term strategy in mind. Phiri hires you as a nancial adviser. The following notes are provided:

Phiri currently has a K2.0 million portfolio that has a large concentration in stocks. Over the past ve years, the portfolio has averaged 20 percent annual total return on investment. Phiri hopes that, over the long term, his portfolio will continue to earn 20 percent annually. When asked about his risk tolerance, he described it as average. He was surprised when informed that the stocks in his portfolio have experienced extremely high volatility. He does not expect to retire before age 70. His current income is more than sufcient to meet his expenses. Upon retirement, he plans to sell his medical practice and use the proceeds to purchase an annuity to cover his postretirement cash ow needs. He has no pension or retirement plan but does have sufcient health insurance for postretirement needs.

Required:

What phase of the investor life cycle do you place Phiri? State your reasons why. (3 marks)

Phiri hopes that, over the long term, his portfolio will continue to earn 20 percent annually. State weather this objective is an absolute or relative return objective. (3 marks)

What is the risk tolerance of Phiri? State your reasons why. (4 marks)

What is the time horizon of Phiri? State your reasons why. (4 marks)

What is the liquidity risk of Phiri? State your reasons why. (4 marks)

What asset allocation do you advise Phiri undertakes between the three asset groups of stocks, bonds and cash. (2 marks)

[TOTAL: 20 MARKS]