Homework answers / question archive / Assessment Description<br/>The investment policy statement (IPS) is an important document in professional investment management because it states the risk, return and all other personal characteristics of the investor that ultimately determines what the investment portfolio looks like

Assessment Description<br/>The investment policy statement (IPS) is an important document in professional investment management because it states the risk, return and all other personal characteristics of the investor that ultimately determines what the investment portfolio looks like

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Assessment Description<br/>The investment policy statement (IPS) is

an important document in professional investment management because it states the risk, return and all other personal characteristics of the investor that ultimately determines what the investment portfolio looks like.
You are required to construct an investment policy statement for a client based on the scenario given below. You should follow the IPS template given to you in Week 9, and follow the steps of portfolio planning and construction covered in your notes. You should also take special note of the workshop activity questions for Week 9 as well. While you have not yet covered ethics (which will be done in Week 11, after you submit your assignment), you should undertake some independent research on ethical investment behaviour and ensure that your IPS follows the appropriate ethical guidelines.
You should construct your IPS using the following headings (with marks as allocated).

-Investment Objectives. State and explain the risk preferences and return objectives of your client. This is the most important part of the IPS and the investment portfolio constructed must be consistent with these risk and return preferences. (6 marks)
-Investment Constraints. State and explain the investment constraints your client faces. (4 marks)
-Asset Allocation and Investment Guidelines. State an asset allocation that may be appropriate for your client, and any other possible investment strategies and/or allocations that you might consider for your client. You must fully justify your chosen asset allocation. (5 marks)
-Construct an IPS. Put all the information above into a single IPS, and include all other relevant information such as client background, frequency of monitoring the investment portfolio and reviewing its performance etc... Your final IPS must be professionally written. (5 marks)
-Investment Portfolio. Construct an investment portfolio with the target asset weights and recommend individual securities for inclusion along with their portfolio weighing. Explain why this portfolio is suitable for your client. (5 marks)



Scenario
Your client's name is Warren Buffet. After meeting with Warren on a number of occasions and visiting him in his family home, your investment assistant has recorded the following notes.

-Warren is a senior administrative manager for a large domestic company in Melbourne, where he has worked for two years. He has had a long working life and has consistently swapped jobs frequently, sometimes with periods of unemployment in between. Warren is becoming increasingly grumpy with life and sometimes this affects his employment security.
-Warren is currently 45, and because he is pretty unhappy with his administrative job, he would like to retire as soon as he can, although he understands he may have to wait until he is 60. Warren's health is ok and he expects to make it to the average life of an Australian, which is about 82.
-Warren receives an annual salary of $80,000 and makes the standard contribution to superannuation. He spends his entire income and has little savings. He currently has a superannuation balance of $15,000, which is so low because he has spent much of his life working overseas in countries where payments for retirement funds are not mandatory.
-He is separated, but still married, to his wife, but he and his wife have separated their financial dealings in a legal contract and now they live separate lives.
-They have one child, and Warren and his wife have agreed to equally fund their child's education until he turns 18. For Warren, this means a commitment of $15,000 a year for the next 6 years.
-Warren has a mortgage of $100,000 on his house, which he believes he will be able to pay off before he retires. Apart from this, he has no other debts. In the past however, he has had significant credit card debts, but these have all been paid off.
-Warren's great aunt Edith passed away recently, leaving him with an inheritance of $1.2m. This was actually the motivator for contacting you to get some investment advice. He is yet to work out what to do with this money, so it is just sitting in a bank account collecting 0.75% interest a year.
-Warren has had little exposure to investing. He filled out a risk questionnaire you gave him and he said things like "making money in the stock market is possible, but some luck is involved" and "safety is more important than return".
-He would rather stay away from "exotic" asset classes (hedge funds for example) and stick to the more conventional ones. He trusts in property because he thinks people will always need a place to live and work. He also doesn't like the idea of having most of his money "locked away" where he can't easily get it.
-Warren gets stressed very easily and is of a nervous nature. He says he sometimes thinks of himself as the Mr Bean character from the TV show.
-Warren has learnt his lesson from his history of credit card debt and likes to be on top of his finances. This means he requires frequent updates on performance.
-Because of family reasons, Warren dislikes gambling and refuses to invest in anything gambling related.
-Warren estimates that his living expenses in retirement will be approximately $80,000 a year. This figure
-is high because Warren likes to travel and he has very expensive tastes in wine.
-You and your investment assistant believe inflation will average 3% a year into the foreseeable future.