460 hw

Christa estimates that her revised annual living expenses, including a new studio and apartment, will average ¤132,500 (excluding J¨urgen’s educational costs). If necessary, she could combine her apartment and studio to reduce spending by ¤32,500. She does not want her financial security to be dependent on further gifting from her parents and is pleased that, after the sale of IngerMarine, she will be able to meet her new living expenses with proceeds from art sales (¤50,000) and the expected total return of the proposed investment portfolio (¤82,500). Because of the uncertainty of art sales, Christa plans to establish an emergency reserve equal to one year’s living expenses. Her after-tax proceeds from the sale of IngerMarine are expected to be ¤1, 200, 000 × (1 − 0.15) = ¤1, 020, 000. She also holds ¤75,000 in balanced mutual funds and ¤25,000 in a money market fund. Christa intends to reevaluate her policy statement and asset allocation guidelines every three years.

1. Discuss Christa’s liquidity requirements.

2. Determine Christa’s return requirement and evaluate whether her portfolio can be

expected to satisfy that requirement if inflation averages 3 percent annually and she

reduces her annual living expenses to ¤100,000 by combining her apartment and studio.

3. Explain why an analysis of Christa’s

Hans’s increasingly irresponsible lifestyle has become a burden to his parents. Hans

was recently arrested for reckless driving—he crashed his car into a restaurant, causing considerable damage and injuring a patron. As a result of Hans’s behavior, Peter has placed him on probationary leave of absence from Inger Marine but will allow him to retain his annual salary of ¤100,000. The restaurant patron is suing Hans for ¤700,000 in damages, and the restaurant owner estimates that it will take ¤500,000 to repair damages to his building. Hans’s insurance will cover costs to a maximum of only ¤200,000.

4. Assess the impact of these events on Hans’s liquidity and his personal financial statement.  What course of action should he pursue?

5. Assess Hans’s probable future ability to assume risk, based on information about his background and current living situation.