Question

You are a team of portfolio managers of Investment Advisory Services, Inc. Your firm has been invited to meet with the trustees of the Midlands Museum Endowment Fund. The Midlands Museum is a privately endowed charitable institution that is dependent on the investment return from a $25 billion endowment fund to balance the budget. The treasurer of the museum has recently completed a study that indicates a need for cash flows from the endowment fund of 3.0 billion in 2019, $3.2 billion in 2020, and 3.5 billion in 2021 in order to balance the budget. At the present time, the entire endowment portfolio is invested in Treasury bills and money market funds because the trustees fear a financial crisis. The trustees do not anticipate any further capital contributions to the fund. The trustees are all successful businessmen, and they have been critical of the fund's previous investment advisers for not following a logical decision-making process. In fact, several previous managers have been dismissed because of their inability to communicate with the trustees and their preoccupation with the fund's relative performance rather than the cash flow needs.

Investment Advisory Services, Inc., has been contacted by the trustees because of its reputation for understanding and relating to its clients' needs. The trustees have specifically asked to meet with you because of your recent article in a professional journal outlining the decision-making process of your firm. In the letter of invitation addressed to you, the trustees have included the flow chart in Exhibit A and the following quotations from a speech by Professor William Sharpe that were included in the article:

"It is important to understand that, even if the market were perfectly efficient with every security plotting right on the plane, the investment management process would still require sophisticated procedures. In particular, it would require the tailoring of portfolios to meet clients' attitudes toward risk and clients' attitudes toward yield vis--vis gains.

One important part of this exercise (modern portfolio theory) is finding out what the client is all about - where one client differs from another.

The Trustees have asked you, as a prospective portfolio manager for the Midlands Museum Endowment Fund, to compile a written report in response to the following questions. Your report will be circulated to the trustees prior to the initial interview on 30 April 2019.

Define and Explain how the below factors relates to the determination of either investor objectives or investors contraints, to determine the portfolio policies:

Factors

Liquidity requirements

Return requirements

Risk tolerance

Time horizon

Tax considerations

Regulatory and legal considerations

unique needs and circumstances

Explain the processes in Exhibit A:

Exhibit A the Portfolio Management Process

Identification and Specification of:

Investors' Objectives

Investors' Constraints

Expectational Factors Regarding

Economic Analysis,

Determination of Market Analysis, and

Portfolio Policies Individual Security Analysis

Determination of Portfolio Policies

Integration of Portfolio policies and Expectational Factors:

Asset Allocation

Investment Strategies

Execution

Monitoring the Portfolio And Responding to Change

Portfolio Performance