QUESTIONS 7, 8, AND 9, INCLUDING GUIDELINE ANSWERS (STUDY SESSION 9...

2. Questions 7, 8, and 9, including Guideline Answers (Study Session 9)

a) formulate and justify an investment policy statement for an individual investor.

Guideline Answer:

Part A

Return Objective:

Yeo’s return objective is to earn a total rate of return that is sufficient to maintain the real value

of the portfolio, while meeting her son’s educational expenses and her annual charitable

contributions, as well as support her ongoing living expenses during retirement.

Calculation of after-tax nominal rate of return:

One year from

Two years from now

now

(end of 1

year of

(retirement)

retirement)

Inflows MYR MYR

Retirement gratuity (taxable) 450,000 -

Interest income from money market fund (taxable)

30,000 -

Sale of Sawit stock (non-taxable) 8,500,000 -

Redemption of provident fund savings (tax-exempt) 500,000 -

Total Inflows 9,480,000 -

Outflows

Income Tax (at 28%)

(134,400) -

Living and Miscellaneous

(257,500)

Education for Lok

(150,000) (159,000)

Donation to Malaysian charity

(100,000) (100,000)

Total Outflows (384,400) (516,500)

Net Additions/Withdrawals MYR 9,095,600 (MYR 516,500)

Notes:

Investable Assets and Required Return

Investable Assets at Retirement (MYR)

Year 0 Net Cash Flow 9,095,600

Money Market Fund 1,200,000

MYR 10,295,600

Distributions in Year 1 (MYR 516,500)

Required After-Tax Real Rate of Return 5.0167%

Note:

The Yeo’s family home is their primary residence, and is not considered to be an investable

asset.

Required After-Tax Real Rate of Return = 5.0167%

Plus: 3% annual inflation rate = 3.0000%

Required After-Tax Nominal Rate of Return = 8.0167%

Proof: