Describe an appropriate set of investment objectives

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Reference no: EM131054520

Question 1. Based on the following information calculate the expected return and the standard deviation for the two stocks.

State of Economy	Probability of State of Economy	Rate of Return on stock A	Rate of Return on stock B
Recession	0.10	6%	-20%
Normal	0.60	7%	13%
Boom	0.30	11%	33%

a. What is the expected return on stock A and stock B?

b. What is the variance and standard deviation for stock A and stock B?

c. What is of the standard deviation of an equally weighted portfolio of these two stocks if the correlation is 0.2?

Quesiton 2. Based on the following information, calculate the expected return, standard deviation and coefficient of variation of each of the following stock. Assume each state of the economy is equally likely to happen.

State of Economy	Rate of Return on stock A	Rate of Return on stock B
Bear	6.3%	-3.7%
Normal	10.5%	6.4%
Bull	15.6%	25.3%

a. What is the expected return on stock A and stock B?

b. What is the standard deviation for stock A and stock B

c. What is the coefficient of variation for stock A and stock B and identify which stock is relatively risky?

Quesiton 3. Compare and contrast the scope and construction of the following three U.S. stock market indices:

the Dow Jones Industrial Average (DJIA);
the Standard and Poor 500 (S&P 500);
the NASDAQ Composite index.

4. Identify the following conditions according to where each fits in the objective constraints-policies framework.

a. Invest 5% in bonds and 95% in stocks.

b. Do not invest more than 10% of the budget in any one security.

c. Shoot for an average rate of return of 11%.

d. Make sure there is $95,000 in cash in the account on December 31, 2015.

e. If the market is bearish, reduce the investment in stocks to 80%.

f. As of next year, we will be in a higher tax bracket.

g. Our new president believes pension plans should take no risk whatsoever with the pension fund.

h. Our acquisition plan will require large sums of cash to be available at any time.

5. Mrs. Mary Atkins, age 66, has been your firm's client for five years, since the death of her husband, Dr. Charles Atkins. Dr. Atkins had built a successful newspaper business that he sold two years before his death to Merit Enterprises, a publishing and broadcasting conglomerate, in exchange for Merit common stock. The Atkinses have no children, and their wills provide that upon their deaths the remaining assets shall be used to create a fund for the benefit of Good Samaritan Hospital, to be called the Atkins Endowment Fund.

Good Samaritan is a 180-bed, not-for-profit hospital with an annual operating budget of $12.5 million. In the past, the hospital's operating revenues have often been sufficient to meet operating expenses and occasionally even generate a small surplus. In recent years, however, rising costs and declining occupancy rates have caused Good Samaritan to run a deficit. The operating deficit has averaged $300,000 to $400,000 annually over the last several years. Existing endowment assets (that is, excluding the Atkins's estate) of $7.5 million currently generate approximately $375,000 of annual income, up from less than $200,000 five years ago. This increased income has been the result of somewhat higher interest rates, as well as a shift in asset mix toward more bonds. To offset operating deficits, the Good Samaritan Board of Governors has determined that the endowment's current income should be increased to approximately 6% of total assets (up from 5% currently). The hospital has not received any significant additions to its endowment assets in the past five years.

Identify and describe an appropriate set of investment objectives and constraints for the Atkins Endowment Fund to be created after Mrs. Atkins's death.

6. You have been named as investment adviser to a foundation established by Dr. Walter Jones with an original contribution consisting entirely of the common stock of Jomedco, Inc. Founded by Dr. Jones, Jomedco manufactures and markets medical devices invented by the doctor and collects royalties on other patented innovations.

All of the shares that made up the initial contribution to the foundation were sold at a public offering of Jomedco common stock, and the $5 million proceeds will be delivered to the foundation within the next week. At the same time, Mrs. Jones will receive $5 million in proceeds from the sale of her stock in Jomedco.

Dr. Jones's purpose in establishing the Jones Foundation was to "offset the effect of inflation on medical school tuition for the maximum number of worthy students."

You are preparing for a meeting with the foundation trustees to discuss investment policy and asset allocation.

a. Define and give examples that show the differences between an investment objective, an investment constraint, and investment policy.

b. Identify and describe an appropriate set of investment objectives and investment constraints for the Jones Foundation.

c. Based on the investment objectives and investment constraints identified in part b, prepare a comprehensive investment policy statement for the Jones Foundation to be recommended for adoption by the trustees.

Reference no: EM131054520

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