Robert Axelrod (54 yrs old) is a retiring fund manager. He has recently sold his fund to a competitor and is now considering life afterwards. The sale of the business will net $3.4 bn upfront along with a reoccurring payment of $2.5 million annually starting next year and continuing for the next ten years as residuals in the business with an annual inflation adjustment. He has asked you to help him evaluate his estate plans as the sale of his fund completes. Before the sale he holds a personal portfolio of $1.2bn in cash and liquid securities. He has two children, Robert Jr(12 yrs old) and Gordon (14 yrs old) as well as an ex-wife, Laura (48 yrs old), all of whom he supports via alimony/child support. Last year's payment totaled approximately $650,000. There is also an agreement that upon the sale of the business, Laura will be entitled to 49% of the company's sale (and taxes owed) which will be independent of Robert as she was a co-founder of the company. Robert's expenses were roughly $535,000 last year. All expenses are believed to continue to grow with inflation. You conduct an interview with Robert to build out the portfolio and develop an understanding of him and his family. The following are excerpts from that interview: - "I have spent most of my career identifying risks and rewards and making prudent and well researched ideas. But my business grew larger because I was able to dispassionately listen to those I hired and make calculated decisions on what they presented." - "My children's college education, if they choose to attend to has been handled in irrevocable trusts that are not on my balance sheet." - "Unlike my fund's performance, I am not looking for the same astronomical level returns. I would like performance inline with the broader market." - "Reviewing forecasts, I predict that inflation will settle to a steady state of 3.2% ongoing." - "The sale of the company will be treated like the sale of any appreciating portfolio asset." - "My current income tax rate is 45% and capital gains rate is 35% " i) What type of investor is Robert? How would you classify him and why? (2 pts) ii) Define Robert's portfolio risk by filling out the table below. Justify each of your choices. (6 pts) iii) What are Robert's total expenses for the coming year? (5 pts) iv) Determine the constraints on the portfolio for Robert. Elaborate on time horizon, liquidity needs for the next year (hint, part of this is a number related to expenses), legal, regulatory, tax considerations and any unique circumstances. ( 3pts) v) After your first meeting, Robert calls you with some changes. He has decided to start another business. He has decided to start building another investment firm. The first year's expenses will be approximately $5,250,000 in expenses that will grow at inflation for the next five years before becoming self-sufficient. a. What are the return requirements on the portfolio now? (5 pts) b. What are the constraints of the portfolio now? ( 2pts) vi) You have narrowed the portfolio composition to a selection of 4 different potential portfolios. Based on the constraints of the portfolio, which of the following would be the best selection also taking into account diversification and efficiency? ( 2 pts)