University of Hong Kong

Postgraduate Diploma in Investment Management

Portfolio Management Module
Assignment 2

You as a portfolio manager in the Trust Department of BigBanc, has been asked to review the
investment portfolio of Robert and Mary Chan, a 40-year-old husband and a 35-year-old wife. Rita,
their 6-year-old children, is a healthy kid who seemed to have an interest in playing the piano.

Robert has a stable and secured job working at DBA Technology Ltd, with an annual salary of $160,000
which is expected to grow annually at the inflation rate. Medical cost is covered by company insurance.
The family currently has an annual expense of $112,000. Robert would like to retire at the age of 55,
and have the following goals:
To grow the portfolio in order to provide living expense after his retirement. It is estimated that
$3,000,000 (after-tax) is needed at retirement to achieve this goal.
to renovate the current apartment in 6 months, which is est. to be $25,000.
Provide the education cost of Rita when she goes to college
A gift to Rita at the age of 25 of $2,000,000.

Roberts mother just died last year, and Robert has inherited $700,000, thus bringing his portfolio asset
to $1,500,000 (after-tax), with 50% of assets put in DBA Technology Ltd. The present value of Ritas
education cost is $140,000, and the present value of the gift to Rita is $900,000. Inflation is estimated to
be 3%. Robert faces a tax rate of 30%.

Peter interviewed Robert who has made the following comments:

I have been working in DBA Technology for 10 years, and from my day-to-day work, I know
that the company is a good company to invest.
I have had bad experience during the Asian financial crisis that my portfolio value dropped
significantly. I also had bad experience in investing in Japanese equities, and I have a strong will
not to invest in that sector. I also do not want to see my portfolio going down by 15% in one
year.
I do not want any of my investments in environmental unfriendly companies.

A. i. Formulate the risk objective of an investment policy statement for Robert.

ii. Formulate the return objective of an investment policy statement for Robert. Calculate the
pre-tax rate of return that is required to achieve this objective. Show your calculations.

B. Formulate the constraints portion of an investment policy statement for Robert, addressing each
of the followings:
i. Time horizon
ii. Liquidity requirements
iii. Tax concerns
iv. Unique circumstances

Note: Your response should not address legal and regulatory factors.