Mr. Franklin is 70 years of age, is in excellent health, pursues a simple but active lifestyle,
and has no children. He has interest in a private company for $90 million and has decided
that a medical research foundation will receive half the proceeds now and will be the primary
beneficiary of his estate upon his death. Mr. Franklin is committed to the foundation’s
well-being because he believes strongly that, through it, a cure will be found for the
disease that killed his wife. He now realizes that an appropriate investment policy and asset
allocations are required if his goals are to be met through investment of his considerable
assets. Currently, the following assets are available for use in building an appropriate
portfolio for him:
$45.0 million cash (from sale of the private company interest,
net of a $45 million gift to the foundation)
$10.0 million stocks and bonds ($5 million each)
$ 9.0 million warehouse property (now fully leased)
$ 1.0 million value of his residence
$65.0 million total available assets
a. Formulate and justify an investment policy statement setting forth the appropriate
guidelines within which future investment actions should take place. Your policy statement
should encompass all relevant objective and constraint considerations.
b. Recommend and justify a long-term asset allocation that is consistent with the investment
policy statement you created in Part a. Briefly explain the key assumptions you
made in generating your allocation.
Solution to part a:
As per the given information in the question, we find that;
Mr. Franklin is a recent widower and childless.
Mr. Franklin is of 70 years old and in good health, has a large amount of liquid wealth and wants to leave this estate to a tax exempt medical research foundation. He is also giving cash gift (from the proceeds in the private company) to the same medical research foundation.
Mr. Franklin has no debt, he is in the highest tax brackets and not burdened by specific current income or need.
An investment policy will have the following objectives and constraints:
An inflation adjusted enhancement of capital followed by tax minimization will be the main goal
The long term return goals, good health of Mr. Franklin, a...
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