Jack and Ruth Ingram, each 50 years old, live in Canada and have recently retired. Jack worked
for much of his career at Pitt Manufacturing, a publicly traded, small-capitalization (small-cap)
Canadian firm. Jack has agreed to join Pitt’s board of directors without compensation. The
Ingrams are in good health and have adequate medical insurance coverage.
Jack has accumulated Pitt common stock currently valued at C$1,000,000 through the
company’s employee stock ownership program. Since the Pitt stock has appreciated
significantly in recent years, Jack’s holdings have a low average cost basis. Pitt stock and
options on the Pitt stock are traded in active and liquid markets on a national exchange.
The Ingrams have recently inherited C$2,400,000 net of taxes consisting mostly of small-cap
Canadian equities. The inheritance, the Pitt stock Jack has accumulated, and C$800,000 in bonds
and cash equivalents represent their total financial assets. The Ingrams live in a house with a
market value of C$1,250,000. They have decided to donate the house to a provincial park upon
their death.
Their only child, Paul (22 years old), has a well-paying job and is economically independent.
The Ingrams are meeting with Caleb Swann, CFA, their long-time advisor, to discuss financial
planning issues. The Ingrams agree that their current annual pre-tax income need is C$200,000.
The Ingrams expect that their inflation-adjusted expenses will remain constant during retirement.
They plan to fund their living expenses by taking annual distributions from their portfolio with
the first distribution to occur immediately. Swann believes an appropriate long-term inflation
rate is 2.5 percent and an appropriate planning horizon is 35 years.
Upon their death, the Ingrams wish to leave gifts to Paul and to a local charity. They wish to
maintain the purchasing power of these gifts to be equivalent to C$2,000,000 and C$1,000,000,
respectively, in today’s dollars.
In order to better understand his clients, Swann has found it useful to classify each of them as
one of four investor personality types:
•Cautious
•Methodical
•Spontaneous
•Individualist
Level III
Swann believes he has gathered enough information about the Ingrams to determine their
personality types. A summary of this information is presented in Exhibit 1.
Exhibit 1
Personality Information Gathered on Jack and Ruth Ingram
•Jack often reads about investing and realizes that achieving higher returns is
accompanied by taking higher risk.
•Jack and Ruth both agree they will accept a lower return if it means they can
take less risk.
•Jack likes to be presented with facts rather than generalities, and he is always
interested in discussing articles about investing.
•When Ruth was a child, her parents experienced significant financial
difficulty as a result of poor performance of their equity investments.
•Ruth is concerned whenever the Ingrams’ portfolio experiences moderate
fluctuations in value.
In assessing the Ingrams’ willingness to take risk, Swann concludes that a shortfall risk (defined
as the expected return minus two standard deviations) of –12 percent in any one year would be
the most the Ingrams could tolerate.
A.
Preparethe nominal pre-tax return objectives of an investment policy statement (IPS) for
the Ingrams.
Showyour calculations.
(12 minutes)
B.
Characterizethe Ingrams as below-average, average, or above-average in their ability to
take risk.
Justifyyour response with
threereasons based on the Ingrams’ specific
circumstances.
Answer Question 1-B in the Template provided on page 7.
(7 minutes)
C.
Selectthe investor personality type for:
i. Jack
ii. Ruth
Justify
eachselection with
one
fact from the information about the Ingrams presented in
Exhibit 1.
Answer Question 1-C in the Template provided on page 8.
(4 minutes)
D.
Preparethe constraints section of an IPS for the Ingrams.