YOU ARE CREATING AN INVESTMENT POLICY STATEMENT FOR JANE DOE General: 60 years old, 3 grown children that are living on their own and supporting themselves. She is in a very low tax rate so we don't even consider anything relating to taxes for this account (we haven't studied taxes yet.) Could live 20 or 30 more years. She is in a nursing home that requires a fixed payment to the home each month, and her full health insurance and expenses are also completely covered by a separate fixed payment each month. There is no planned changes in those monthly amounts needed until the day she passes away. No other significant withdrawals should happen, just those steady living expenses. This portfolio: She and her children mainly want to be assured that it will produce a steady amount each month to continue to pay her nursing home and health insurance payments until the day she passes away. It has earned a substantial and steady return in the past, and has been able to make the payments just from its earnings, without reducing its overall balance. Question 6 6 pts You then explain that as holding periods compound from year to year, this creates an overall multi-year measurement called the C.A.G.R. (as computed in Portfolio Visualizer.) Calculate for her the C.A.G.R. for yearly returns in the following order: 4%, -5%, 12%, 0%, 18%. 7.61% 5.48% 5.80% 6.11% Question 7 6 pts And you let her know that you can also find those returns in Portfolio Visualizer. Using Portfolio Visualizer, list below the C.A.G.R. for the US Stock Market asset class for the years 2000 - 2019 inclusive. (Assume all other inputs for Portfolio Visualizer can be left at their default settings.) 6.30% 14.91% 9.28% none of the above Question 8 6 pts You then explain that even C.A.G.R. has the limitation that it is not dollar-weighted, meaning it assumes the same amount is invested each year. Show the Dollar- Weighted return of the following investments for one of the years you are deciding for her (rounded to 2 decimal places): Amount Return $ 500K 8% $1,000K 10% $1,500K 12% $2,000K 14% O 10.00% O 11.00% 12.00% none of the above Question 9 6 pts And finally, you let her know the after-tax holding period return, to show her the effect of taxes on return rates in general. Compute the after-tax return of the following bond, which is bought at a premium. Round to two decimal places. Face Value = $100,000 Purchase price (Jan 1) = $120,000 First Coupon Payment (March 1) = $6,000 Second Coupon Payment (September 1) = $6,000 Sale price (December 31) = $114,000 Tax rate of holder = 20% 20.08% 12.00% 4.00% none of the above Question 10 6 pts As you anticipate talking to her about the next big subject of risk, you explain that probabilities will start to be considered, where the market could be considered as being "good, better, best" each year, with different returns for each scenario. As an example, compute for her the expected holding period return of an investment subject to the following three scenarios for the year: Good: HPR = 5% Probability = 0.60 Better: HPR = 10% Probability = 0.30 Best: HPR = 15% Probability = 0.10 6.00% 0 7.50% O 10.00% none of the above Question 11 6 pts You now leave the first two steps, Investment Objectives, and Types or Return, and go on to Constraints. You tell her the one Constraint that needs to be addressed for everyone is risk. You realize she fears there is no way to eliminate any risks at all, and you try to help her understand the difference between risks that can be reduced or eliminated through diversification, and those that cannot. As an example, you explain that the possibility of the US Congress changing corporation income tax laws for all companies is an example of what kind of risk to the US Stock asset class? a systematic risk an unsystematic risk a risk that can generally be eliminated by a well diversified portfolio within the Asset Class None of the above YOU ARE CREATING AN INVESTMENT POLICY STATEMENT FOR JANE DOE General: 60 years old, 3 grown children that are living on their own and supporting themselves. She is in a very low tax rate so we don't even consider anything relating to taxes for this account (we haven't studied taxes yet.) Could live 20 or 30 more years. She is in a nursing home that requires a fixed payment to the home each month, and her full health insurance and expenses are also completely covered by a separate fixed payment each month. There is no planned changes in those monthly amounts needed until the day she passes away. No other significant withdrawals should happen, just those steady living expenses. This portfolio: She and her children mainly want to be assured that it will produce a steady amount each month to continue to pay her nursing home and health insurance payments until the day she passes away. It has earned a substantial and steady return in the past, and has been able to make the payments just from its earnings, without reducing its overall balance. Question 6 6 pts You then explain that as holding periods compound from year to year, this creates an overall multi-year measurement called the C.A.G.R. (as computed in Portfolio Visualizer.) Calculate for her the C.A.G.R. for yearly returns in the following order: 4%, -5%, 12%, 0%, 18%. 7.61% 5.48% 5.80% 6.11% Question 7 6 pts And you let her know that you can also find those returns in Portfolio Visualizer. Using Portfolio Visualizer, list below the C.A.G.R. for the US Stock Market asset class for the years 2000 - 2019 inclusive. (Assume all other inputs for Portfolio Visualizer can be left at their default settings.) 6.30% 14.91% 9.28% none of the above Question 8 6 pts You then explain that even C.A.G.R. has the limitation that it is not dollar-weighted, meaning it assumes the same amount is invested each year. Show the Dollar- Weighted return of the following investments for one of the years you are deciding for her (rounded to 2 decimal places): Amount Return $ 500K 8% $1,000K 10% $1,500K 12% $2,000K 14% O 10.00% O 11.00% 12.00% none of the above Question 9 6 pts And finally, you let her know the after-tax holding period return, to show her the effect of taxes on return rates in general. Compute the after-tax return of the following bond, which is bought at a premium. Round to two decimal places. Face Value = $100,000 Purchase price (Jan 1) = $120,000 First Coupon Payment (March 1) = $6,000 Second Coupon Payment (September 1) = $6,000 Sale price (December 31) = $114,000 Tax rate of holder = 20% 20.08% 12.00% 4.00% none of the above Question 10 6 pts As you anticipate talking to her about the next big subject of risk, you explain that probabilities will start to be considered, where the market could be considered as being "good, better, best" each year, with different returns for each scenario. As an example, compute for her the expected holding period return of an investment subject to the following three scenarios for the year: Good: HPR = 5% Probability = 0.60 Better: HPR = 10% Probability = 0.30 Best: HPR = 15% Probability = 0.10 6.00% 0 7.50% O 10.00% none of the above Question 11 6 pts You now leave the first two steps, Investment Objectives, and Types or Return, and go on to Constraints. You tell her the one Constraint that needs to be addressed for everyone is risk. You realize she fears there is no way to eliminate any risks at all, and you try to help her understand the difference between risks that can be reduced or eliminated through diversification, and those that cannot. As an example, you explain that the possibility of the US Congress changing corporation income tax laws for all companies is an example of what kind of risk to the US Stock asset class? a systematic risk an unsystematic risk a risk that can generally be eliminated by a well diversified portfolio within the Asset Class None of the above