Analyse each of the five portfolios based on the investment policy of Brenda


SKU: solviv11 Category:
  • Return requirement
  • Risk tolerance
  • Time horizon


Brenda Jones is a Senior Vice president of Rationality International, a psychology counselling organisation located in USA. It has a number of branches all over the country and is listed in AMEX. The current situation of Brenda is describe below:

Brenda is 57 years old. She is unmarried and single. She has no immediate family, no debts, and stays in a rented place and does not own any property.

Brenda plans to retire in 8 years when she will turn 65.

Her salary is $400,000 a year which is protected for inflation. This salary is sufficient to support her present lifestyle but cannot generate any excess for savings.

She has accumulated $3 million in saving from past earnings and she has invested all these savings equally in money market fund and municipal bonds fund on the average provide a return of 7%. The income from money market instruments is taxable at 35% and the income from municipal bonds is tax free. Both funds provide for reinvestment of the income and Brenda takes advantage of this provision.

Rationality International does not provide any pension plans nor does it pay an dividends but offers stock bonus incentive plans.

Based on the stock plan, Brenda has accumulated stocks of Reality International over time and these shares are worth $8 million at the current market value. The stock bonus did not result in any tax at the time the stocks were received but if sold, the entire proceeds will be taxed at a rate 35%. She expects that these stocks will be worth $8 million in 8 years when she retires.

Brenda anticipates that she will hold the stock for a long time, and sure to hold it at least till her retirement.

Brenda expects that she will be spending at the current rate even after her retirement.

She expects the inflation to be about 4% a year after her retirement.

Brenda is subject to a tax rate of 35% on her salary income, investment income and realised capital gains and she expects to continue to be in the same tax brackets even after her retirement.

Brenda is a careful and conservative investor. She has estimated that an annual after-tax total return of 30% would be suffcient as long the investment portfolio from her savings does not decline by more than 12% in nominal terms in any given 12-month period.

Assume Brenda will live till 80 years old.

Her investment advisor has suggested 5 different protfolios for her which are shown in Exhibit 1.



1) The expected total retuern are before-tax total returns

2) The municipal bonds do not require any taxes to be paid

3)Real rate = nominal rate – expected inflation


Question 1

Prepare an investment policy statement for Brenda lones outlining

a) Return requirement

b)Risk tolerance

c)Time horizon

d) Liquidity

e) Taxes

f) Unique circumtances


Question 2

Based on the information provided in Exlubi 1 and the investment policy statement in Question 1 prepare the answer to the following question.

a) Calculate  the expected nominal after-tax return for each of the portfolio


b)Calculate the expected real after-tax return for each of the portfolio


c)Calculate the worst case scenario where the return in that scenario would be adjusted for 2 standard deviation of returns.


d)Analyse each of the five portfolios based on the investment policy of Brenda


e)Recommend end the portfolio that Brenda should choose.


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