Read the following case and prepare report that answers the following questions:

1.Identify the constraints faced by the investor. You should pay special attention to these constraints while designing the portfolio.

a.Some of the examples of constraints are related to liquidity, investment horizon, regulations, taxes, and unique needs (for example, consumption concerns).

2.Identify the risk and return objectives while considering constraints identified.

a.On a qualitative basis, what is the minimum return that would satisfy your investor?

b.Which factors contribute to ability and willingness of the investor to take risk?

3.What type of assets should be included in your portfolio?

a.Assets should be thought of in terms of broad asset classes, such as bonds, stocks, and risk-free assets.

b.You can, further, classify assets in terms of developed market assets versus emerging markets assets, or in terms of high growth industries versus stable industries, or cyclical industries versus defensive industries.

c.Specify the asset allocation weights for each asset class included into the portfolio and justify the weightings.

Bobby Wilson and his wife, Elena, have been married for nearly 30 years, during which time they have enjoyed enormous business success. The Wilsons started their marriage as small shopkeepers and grew their business rapidly. They turned their first shop into a successful chain of retail stores. From that base, they expanded into global trading. Eventually, they began to manufacture a variety of items for sale in both their own stores and for export.

After diversifying their business geographically and integrating vertically, the Wilsons broadened their business interests into real estate. Their holdings expanded beyond their initial investment in residential apartments into large commercial spaces and office buildings. Ultimately, they parlayed their first small business into a large conglomerate, incorporating several industries on both sides of the Pacific. Even though Bobby Wilson is 61 and his wife is 58, they remain very active in running their businesses.

In addition to their varied business interests, the Wilsons have a substantial portfolio of marketable securities. Although they have historically managed their securities portfolio themselves, they decided to bring in a professional adviser once the portfolio exceeded 100 million UDS dollars. They consulted Michael Walker, CFA, about the asset allocation and security selection in their investment portfolio.

The Wilsons told Michael, "We have two grandchildren, and we would like to be able to leave each one 100 million USD in today's dollars (i.e., in real value) of marketable securities in our estate." Michael reminded the Wilsons that they could expect to enjoy long lives, but Bobby Wilson responded, "Kindly plan our investments so the portfolio reaches the target by the time I am 75." Michael points out that the current value of the portfolio is already 102 million USD, so that goal should be reachable, especially because the Wilsons are not subject to income taxes on portfolio income or capital gains.

The Wilsons would also like to fund some charitable activities. "If the portfolio can afford it, we would also like to give 1 million USD per year to various organizations," Elena tells Michael. "And we would like to increase that figure every year for inflation," adds Bobby Wilson. Michael and the Wilsons agree to plan for an inflation rate of 1% per year.

Michael reviews the current holdings in the portfolio with the Wilsons. He notes that the portfolio contains nearly 20 million USD of equity in the Yellow Flower Trading Company (YFTC). The Wilsons have had YFTC in their portfolio for several years because they consider it a good company. Michael advises them, however, to sell some of the position in order to diversify their portfolio. Bobby Wilson points out to Michael that YFTC has fallen 15% from its high, reached several months ago. "We don't want to lose money, so please wait to sell until it comes back."