Question 1: A i. Long time horizon with Two Stage: First Stage: Now till they are retired (twins go to college) Second Stage: Retirement years ii. Unique circumstances: Gift to twins college tuition $25,000 each. Vacation home in Miami, $200,000 iii. Liquidity: $25,000 times 2 + $200,000 + $2,000,000 = 2,250,000 @ time of retirement
Risk: Ability: High, since long time horizon with large portfolio value Willingness: average, since they don't want to speculate. Overall tolerance: Average
Return: To be able to make a gift to each of the twins $25,000 when they goes to college. To be able to purchase a vacation home @ retirement in Miami, $200,000. To be able to purchase the annuity cost $2,000,000 to cover their retirement year spending.
Question 2 A i The endowment pays out 3.5% of last year's market value which need to be covering 15% of the university's total needs. The education expenses have been increasing faster than consumer prices, at about 4% per year. This implies the university's total needs will likely to increase 4% each year.
ii This year's 15% expense is $8,750,000. Total expense is 8,750,000 / 15% = 58.33 million Expecting 4% increase in educational expenses: 58.33 *(1 + 4%) = 60.66 million (projected spending) 60.66 * 15% = 9.1 million 9.1 / 3.5% = 260 million (260 - 250 + 8.75) / (250 - 8.75) = 7.77%
B i Three year average ending market value: (325 + 215 + 250)/3 = 263.33 263.33 * 3.5% = 9.22 million This year's spending needs is 9.22 million ii Decreases risk tolerance Three-year rolling average spending meaning equal weights to all 3 year's market value. In ISU's case a strong market three years ago skews the portfolio value upwards and increases the mandatory spending. In turn, it will give a lower market value of the portfolio due to the increased cash out flow. Hence lower the ability to tolerate risks.
D Save-a-Live Foundation has higher risk tolerance than ISU endowment. - It has an option to be a taxable entity which can mitigate risk to tax authorities - The spending rule is based on proceeds rather than market value of the portfolio which proven it from mandate spending during a weak market.
Question 1:
ReplyDeleteA
i. Long time horizon with Two Stage:
First Stage: Now till they are retired (twins go to college)
Second Stage: Retirement years
ii. Unique circumstances:
Gift to twins college tuition $25,000 each.
Vacation home in Miami, $200,000
iii. Liquidity:
$25,000 times 2 + $200,000 + $2,000,000 = 2,250,000 @ time of retirement
B
ReplyDeleteReturn:
TVM: PV = -1250000 ; N= 10; FV = 2250000; PMT = 0; Rate => 6.05%
Risk:
Ability: High, since long time horizon with large portfolio value
Willingness: average, since they don't want to speculate.
Overall tolerance: Average
Return:
DeleteTo be able to make a gift to each of the twins $25,000 when they goes to college.
To be able to purchase a vacation home @ retirement in Miami, $200,000.
To be able to purchase the annuity cost $2,000,000 to cover their retirement year spending.
C
ReplyDeleteTVM: PV = -1250000 ; N= 10; FV = 2250000; PMT = 0; Rate => 6.05%
D
ReplyDeleteAbility
recent inheritance increase the Beckers' ability to tolerate risk.
Willingness
The will wish to live a more lavish lifestyle which will require more expenses likely to increase their willingness to take risk.
Question 2
ReplyDeleteA
i The endowment pays out 3.5% of last year's market value which need to be covering 15% of the university's total needs. The education expenses have been increasing faster than consumer prices, at about 4% per year. This implies the university's total needs will likely to increase 4% each year.
ii This year's 15% expense is $8,750,000.
Total expense is 8,750,000 / 15% = 58.33 million
Expecting 4% increase in educational expenses:
58.33 *(1 + 4%) = 60.66 million (projected spending)
60.66 * 15% = 9.1 million
9.1 / 3.5% = 260 million
(260 - 250 + 8.75) / (250 - 8.75) = 7.77%
B
ReplyDeletei Three year average ending market value:
(325 + 215 + 250)/3 = 263.33
263.33 * 3.5% = 9.22 million
This year's spending needs is 9.22 million
ii Decreases risk tolerance
Three-year rolling average spending meaning equal weights to all 3 year's market value. In ISU's case a strong market three years ago skews the portfolio value upwards and increases the mandatory spending. In turn, it will give a lower market value of the portfolio due to the increased cash out flow. Hence lower the ability to tolerate risks.
C
ReplyDeletei Unique circumstances: Wary of certain investments that contradict with university's policy of a moral and healthy lifestyle.
ii Time Horizon: Infinite
iii Liquidity: 3.5% of last year market value ending December.
D
ReplyDeleteSave-a-Live Foundation has higher risk tolerance than ISU endowment.
- It has an option to be a taxable entity which can mitigate risk to tax authorities
- The spending rule is based on proceeds rather than market value of the portfolio which proven it from mandate spending during a weak market.