Reference no: EM133240582

Question - Finance and Liquidity Annual Living Expenses Discussion

Description - Learning Outcomes -

1. Review situational profiling for individual investors and discuss source of wealth, measure of wealth, and stage of life as approaches to situational profiling.

2. Prepare an elementary situational profile for an individual investor.

3. Discuss the role of psychological profiling in understanding individual investor behavior.

Action Required - Kindly go through the case

Case Study - Relate to the Inger family: father (Peter), mother (Hilda), son (Hans), and daughter (Christa) and her child (Jürgen). Peter is the founder and majority owner of Inger Marine.

Christa estimates that her revised annual living expenses, including a new studio and apartment, will average €132,500 (excluding Jürgen's educational costs). If necessary, she could combine her apartment and studio to reduce spending by €32,500. She does not want her financial security to be dependent on further gifting from her parents and is pleased that, after the sale of Inger Marine, she will be able to meet her new living expenses with proceeds from art sales (€50,000) and the expected total return of the proposed investment portfolio (€82,500). Because of the uncertainty of art sales, Christa plans to establish an emergency reserve equal to one year's living expenses. Her after-tax proceeds from the sale of Inger Marine are expected to be €1,200,000 × (1 - 0.15) = €1,020,000. She also holds €75,000 in balanced mutual funds and €25,000 in a money market fund. Christa intends to reevaluate her policy statement and asset allocation guidelines every three years.

Questions -

1. Discuss Christa's liquidity requirements.

2. Determine Christa's return requirement and evaluate whether her portfolio can be expected to satisfy that requirement if inflation averages 3 percent annually and she reduces her annual living expenses to €100,000 by combining her apartment and studio.