1. Robert Taylor, 50 years old and a U.S. resident, recentlyretired and received a

$500,000 cash payment from his employer as an early retirementincentive. He also

obtained $700,000 by exercising his company stock options. Bothamounts are net of

tax. Taylor is not entitled to a pension; however, his medicalexpenses are covered by

insurance paid for by his former employer. Taylor is inexcellent health and has a normal

life expectancy. Taylor’s wife diedlast year after a long illness, which resulted in devastatingmedical expenses. All their investments, including a home, wereliquidated to fully satisfy these

medical expenses. Taylor has no assetsother than the $1.2 million cash referenced above, and he has nodebts. He plans to acquire a $300,000 home in three months andinsists on paying

cash given his recent adverse experience with creditors. Whenpresented with investment

options, Taylor consistently selects the most conservativealternative.

After settling into his new home, Taylor’s living expenses willbe $2,000 per month

and will rise with inflation. He doesnot plan to work again. Taylor’s father and his wife’s parents diedyears ago. His mother, Renee, is 72 years old and in excellentphysical health. Her mental health, however, is deteriorating andshe has relocated to a long-term-care facility. Renee’s expensestotal $3,500 per month. Her monthly income is $1,500 from pensions.Her income and expenses will rise with inflation. She has noinvestments or assets of value. Taylor, who has no siblings, mustcover Renee’s income shortfall.

EXHIBIT 2-3 Robert Taylor Investment PolicyStatement

Returnobjective                       • Income requirement is $2,000 monthly.

• Total return requirement is 2.7%annually ($24,000/$900,000).

Risk tolerance                         • Substantial asset base and low return requirement provideample

   resources to support anaggressive, growth-oriented portfolio.

Time horizon                           • Client is 50 years old, recently retired, and in excellenthealth.

• Time horizon exceeds 20 years.

Liquidity needs                        • $300,000 is needed in three months for purchase of home.

• Modest additional cash is neededfor normal relocation costs.

   $100,000 may be neededfor possible investment in son’s business.

• A normal, ongoing cash reservelevel should be established.

Tax concerns                                            • There is little need to defer income.

• Mother’s expenses may have aneffect.

Legal and regulatory factors             • No special considerations exist.

Unique circumstances                         • Client desires to support mother.

• Client insists that any investmentin son’s business be excluded from    long-term planning.

• Client has strong aversion todebt.

Taylor has one child, Troy. Troy and a friend need fundsimmediately for a start-up

business with first-year costs estimated at $200,000. Thepartners have no assets and

have been unable to obtain outside financing. The friend’sfamily has offered to invest

$100,000 in the business in exchange for a minority equity stakeif Taylor agrees to invest

the same amount.

Taylor would like to assist Troy; however, he is concerned aboutthe partners’ ability

to succeed, the potential loss of his funds, and whether hisassets are sufficient to support

his needs and to support Renee. He plans to make a decision onthis investment very

soon. If he invests $100,000 in Troy’s business, he insists thatthis investment be excluded

from any investment strategy developed for his remainingfunds.

With the above information, portfolio manager Sarah Wheelerprepared the investment

policy statement for Taylor shown in Exhibit 2-3.

A. Evaluate the appropriateness of Taylor’s investmentpolicy statement with regard to

the following objectives: Reference youranswer.

i. Return requirement

ii. Risk tolerance

iii. Time horizon

iv. Liquidity requirements