After developing the investment policy statement (IPS) for Jack and Ruth Ingram, Caleb Swann,
CFA, reviews their current portfolio, shown in Exhibit 1.
Exhibit 1
Ingrams’ Current Portfolio (%)
Asset Class Current
Allocation
Expected
Annual
Total
Return
Expected
Annual
Standard
Deviation
Cash equivalents 13.0 3.1 3.2
Canadian bonds:
Corporate 4.0 4.5 6.0
Government 9.0 4.0 4.5
Canadian equities:
Large-capitalization 8.0 8.0 12.5
Small-capitalization 41.0 9.5 17.2
Pitt Manufacturing stock 25.0 6.5 34.1
Total portfolio 100.0 7.1 12.1
Swann recognizes that the concentration in the small-capitalization Pitt Manufacturing stock is
too high. The Ingrams have given Swann three specific instructions related to their holding of
Pitt stock:
•Defer the realization of capital gains and the associated capital gains taxes.
•Significantly reduce the downside risk associated with their holding of Pitt stock,
but preserve some upside potential.
•Do not use leverage in the portfolio.
Swann notes that Pitt stock, exchange funds, and put and call options on Pitt stock all have liquid
markets. Swann reviews the following four strategies for achieving the goals of the Ingrams:
•Outright sale
•Equity collar
•Exchange fund
•Completion portfolio
A.
Determinewhich of the four strategies is the
mostappropriate given the Ingrams’
instructions.
Justifyyour response with
tworeasons.
Answer Question 2-A in the Template provided on page 15.
(5 minutes)
Level III
B.
State, for
eachof the strategies not selected in Part A,
onereason why it is
notthe most
appropriate for the Ingrams.
Note: Justifying your answer by simply reversing your response to Part A will receive no
credit.
Answer Question 2-B in the Template provided on page 16.
(6 minutes)
In addition to the high concentration in Pitt, Swann recognizes several other problems in the
Ingrams’ current asset allocation.
C.
Identify, based on the Ingrams’ IPS,
threeother problems in the current asset allocation.
Support
eachof your responses with
onereason.