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Mark and Lisa Knowles, 28 and 26 respectively, have recently gotten
married. They are currently renting but have saved enough for a down
payment on a house, and they also have sufficient emergency reserves.
They are both employed full time, he is a young attorney and she is just
finishing up her audit work with a local CPA firm. Their combined
annual income is $ 180,000 with no dependents. She has already passed
the CPA exam and plans to work for at least another 6 years before they
decide if they want to start a family.
Mark’s mother Ophelia passed away 2 months ago and he just last week
received an inheritance under his mother’s trust of $ 500,000. She had
been working with a young advisor at Morgan Stanley, and Mark just met
with her last week. He was impressed with your Financial Advisory team
during your meeting two days ago, and has decided to transfer this
account to your team. All positions have received a basis step up as a
result of Ophelia’s passing away, so there are no tax consequences to
liquidating any highly appreciated positions. Your job is to design a
portfolio that will be properly suited for this young couple for the
next 5-10 years. Assume that liquidity is not an issue, and that all
interest and dividends will be reinvested.
Your grade for this assignment will be based upon how well you design a
portfolio to optimize the after tax, risk adjusted return consistent
with the risk profile for your client. A portfolio should be efficient
and on a justifiable “indifference curve” as it would pertain to your
client. Utilize what you learn in class about diversification using
various asset classes to minimize risk according to the Markowitz model,
and try to understand the correlations between various asset classes
such as Equities, International Equities, Commodities and Fixed Income.
Further attention should be paid to the size and style components of
the market, referred to as large, mid, and small cap, and growth or
value. To be properly diversified, it is important to have some
exposure to all of these components of the market, as well as developed
and emerging markets internationally. From time to time you will be
receiving industry research from your firm as well as others on the
street, and you should pay attention to current events as they happen in
the markets, with the Fed, internationally and politically in an effort
to understand the impact if any on your client’s account.
The performance of this portfolio during the next 8 weeks or so until
your presentation to the class will not be a factor in determining your
grade. You will be assessed strictly on how well you position the
account strategically for the next 3 to 5 years, your class
presentation, and your implementation of the concepts presented in class
and in your readings. In addition, you should calculate the holding
period return and the annualized hypothetical return for your portfolio.
There is to be no in and out trading, once you purchase or sell a
position, that decision becomes permanent for your portfolio for the
duration of the semester.
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