1. The case (1 page max)

Present the background of the case. Introduce the client and her/his profile. Specific details can be given in the IPS.

• Investor: Justin Trudeau

• Advisor: Tony Stark

• Investors age: 49

• Wife: unemployed (46, taking care of their children)

• Job:

• Trudeau is the Prime Minister of Canada, salary is $167,400 (https://mywage.ca/salary/celebrity-salary/justin-trudeau)

• Inheritance: $500,000 after-tax (mothers estate)

• Assets:

  • Primary residence valued at $600,000

  • 2018 Honda Pilot valued at $25,000

  • Life insurance policy on himself ($1,000,000 value)

  • RSP through work ($80,000)

  • Well-diversified Portfolio: $1,500,000

• Current Expenses (house, etc.):

  • Home+car maintenance expenses: $20,000 per year

  • Living expenses (groceries, clothes etc.): $40,000 per year

  • Vacation Fees: $15,000 in Hawaii per year

• Charity Donation: $200,000 on Boundless School (for children)

• Tax Rate: 30% (in both capital and dividend gains)

• Inflation Rate: 2%

• Spending Rate: 3.5%

• Expected Age to Retire: 65 (16 years left)

Situations:

• Did they lose a significant amount in their portfolio in the previous years? Portfolio has been diversified properly as he communicates with his advisor. Thus, it is also steadily growing.

• What stocks are they not willing to invest in? alcohol companies (most likely oil and gas as well?)

• What goals do they have before and after retirement? to have enough savings for childrens education (currently 14, 12, and 7 years old.)

• What kind of lifestyle do they want to have? Trudeau wants to have a moderate life with his family. He will need $3,000,000 to achieve their retirement goals.

1. Investment policy statement (2 pages max)

Return objective (not finished)

Justin Trudeau wishes to live a modest lifestyle with his family. This means the Trudeaus will live modestly in the future and not go beyond their means. He also stated that he will need $3,000,000 in 16 years to meet their childrens needs and retirement goals. For the coming year, Trudeaus portfolio must generate a nominal pre-tax return before a return of 9.27%.

Required Annual Income After Tax

Annual Income	+167,400
Less: Taxes (30%)	(50,220)
Home + Car Maintenance Expenses	(20,000)
Living Expenses	(40,000)
Vacation Fee	(15,000)
Net Annual Cash Flow	+42,180

Inheritance	500,000
Well-Diversified Portfolio	1,500,000
Subtotal	2,000,000
Less one-time needs:
Charitable Donation	(200,000)
Investable Asset Base	1,800,000

Required After-tax return before retirement

N = 16, FV = $2,500,000, PMT = 0, PV = $1,800,000, R = I = 4.49% + 2%= 6.49%

Required Nominal Pre-tax return before retirement

R = R/ (1-T) = 6.49% / (1 - .30) = 9.27%

Risk tolerance (not finished)

As Justin Trudeau is a methodical investor. Hence, he makes decisions primarily on thinking and is constantly looking for better information on the market. In addition, he also consults with his advisor to manage his assets properly.

Liquidity requirements

Justin Trudeau has high liquidity requirements. He needs enough cash to cover the living expenses of his family, car and house repairs, and vacation to Hawaii once per year, as well as enough cash for an emergency fund. As a result, a large amount of cash and cash equivalents should be held in the portfolio in order to meet his liquidity needs.

Time horizon

Trudeau has a multi-stage time horizon. Specifically, he would like to pay for his 3 childrens post-secondary educations (4, 6, and 11 years until in post-secondary) , and he has 16 years left before retirement. After retirement, he wants to live modestly with his family.

Taxes

Justin Trudeau is a taxable investor. He has a tax rate of 30% for both capital gains and dividends.

• Strategic asset allocation (2 pages max)

Asset classes and ETF proxies (risk-free rate of 2.5%)

This should be a brief discussion

• why the considered asset classes are appropriate for your client and

• brief specification of the ETF that represents the asset class

Appropriate optimization approach

Specify and discuss the optimization problem, e.g. maximize return at a given leverage of risk.

Mean-variance optimization results

Use 50 monthly closing returns the reason is to check the performance on the portfolio for the period. Represent the results in table format.

CAPM

Asset class		E(r)		Correlation
				A	B	C	D	E
1	Money Market	12%	20%	1
2	Canadian Bonds	10%	17%	0.68	1
3	International Bonds	9.5%	15%	0.5	0.35	1
4	Canadian Equities	9%	13%	0.5	0.35	0.15	1
5	Real Estate	8.5%	11%	0.5	0.35	0.15	0.1	1

Corner Portfolio

Asset class		E(r)		Sharpe Ratio	Portfolio Weight
					A	B	C	D	E
1	Money Market	11%	20%	0.425	100%	0.00%	0.00%	0.00%	0.00%
2	Canadian Bonds	10%	17%	0.441	65	45	0.00%	0.00	0.00
3	International Bonds	9.5%	15%	0.467	15	20	20	35	10
4	Canadian Equities	9%	13%	0.500	20	15	10	45	10
5	Real Estate	8.5%	13%	0.462	10	15	15	25	35

9.27 = 9.5w + 9 (1-w)

9.27 = 9.5w + 9 - 9w

0.27 = 0.5w

w = 0.540

Weights of the Assets on Combined Portfolio

Money Market = 0.540 (0.15) + 0.460 (0.20) = 17.3%

Canadian Bonds = 0.540 (0.20) + 0.460 (0.15) = 17.7%

International Bonds = 0.540 (0.20) + 0.460 (0.10) = 15.4%

Canadian Equities = 0.540 (0.35) + 0.460 (0.45) = 39.6%

Real Estate = 0.540 (0.10) + 0.460 (0.10) = 10%

As Justin Trudeau requires 9.27% return over the 16 years to achieve his childrens needs and retirement goals, the recommended allocation is 54% Allocation 3 and 46% Allocation 4. Specifically, these combinations will meet the required return of Truduea portfolio. It also has the highest combination of expected Sharpe ratios among the portfolio.

NOTE: EXPLAIN THE DIVERSIFICATION OF THE ASSETS

question

1. Performance measurement and attribution (4 pages max)

Portfolio returns

Prepare the monthly returns for the period for the asset classes that constitute your portfolio.

Benchmark selection

Select and justify the selection of an appropriate benchmark. Prepare the returns on the benchmark portfolio for the same period. (You might want to run the style analysis first and use it as a guide for the selection of the benchmark asset classes and their weights.)

Performance measurement

Calculate the appropriate performance measures. Select the ones you deem necessary and sufficient to justify the performance appraisal.

Evaluate and explain the proportion of systematic vs. idiosyncratic risk in your portfolio, compared to the benchmark.

Performance attribution

Apply analysis to separate the timing, selection and interaction component of the returns. Discuss briefly their meaning for your portfolio.

2.

1. Risk analysis (1 pages max) - CHAPTER 9

Downside measures

Calculate the downside risk measures covered in class to both the portfolio and benchmark monthly returns and discuss the results.

VaR analysis

Calculate both the analytical and historical VaR of your portfolio at 5% confidence level. If the two values differ, briefly explain why.