Stephen and Kara Moore are both 41-years old, married for 22 years, and have 17-year old triplets (their only children). They live in a house worth $382,000 with $94,000 remaining on their mortgage. Stephen and Kara earned college degrees while in their early twenties. Stephen is a senior sports marketer for a professional baseball team and Kara is a graphic design artist. Both have been extremely successful in their careers and have managed to save $3,539,882, currently being held in fixed income securities earning a yield to maturity of 3.85%. Stephen currently makes $208,000 per year and Kara makes $97,000 per year. This income covers all their living expenses.
The triplets (Joe, John, and Jamie) are one year away from entering college. Joe is quite an athlete and will almost certainly receive a baseball scholarship. John is quite an academic and wants to attend an Ivy League school, which will cost $75,000 per year for four years. Jamie is an artist who wants to attend the Manhattan School of Arts, which will cost $50,000 per year for four years.
Stephen and Kara want to have $100,000 total available for each of their children’s weddings, which will likely occur within 15 years. They will also give each child $50,000 toward a down payment on their homes when they are ready to purchase one. They will start saving this year ($20,000 annually) for both of these purposes. They also would like to take an international vacation to celebrate their 25th wedding anniversary at an expected cost of $80,000.
Stephen is an art collector and movie buff. He has purchased and sold many items that were prominently displayed in popular movies. For example, he bought the hat worn by a notorious gangster in an Academy Award winning movie for $100 twenty years ago and sold it recently for $159,000. Stephen attended a collector's auction with the sole purpose of buying the original art painted by the movie's star in this past summer's blockbuster. Stephen performed significant research on the value of this item and believed it matched his return and risk requirements. He allocated $20,000 for the purchase but became infatuated with another piece of art, which he won for $18,000. He left without the original art work he intended to buy. On his way out, he met a dealer who offered him $10,000 for a gun used in a heist movie that Stephen bought a few years ago for $11,000. The star of that movie that used the gun to kill the bad guys has had a string of losing movies and has lost his status in Hollywood. Stephen believes he will make a comeback and the value of the gun will increase sometime in the future.
When Jamie was born, she was immediately placed in an incubator and nearly died, if not for the work of one particular nurse and doctor. She survived and is thriving health-wise today, but Kara was so moved by the nurse’s skill and compassion for Jamie that she wants to go back to school to become a nurse. She will leave her current job and spend 3 years in nursing school (all while her children are finishing high school and beginning college). She intends to enroll in the local college immediately. A nursing degree will cost $40,000 per year.
Stephen does lots of travelling with his team and loves to fly so much that he has his own pilot’s license. He regularly goes deep water fishing and scuba diving and describes himself as having a wild streak. Kara, on the other hand is much more conservative, preferring to spend hours alone with her graphic design work. When they were first married, Stephen wanted to open his own travel agency but was convinced by Kara that it was too risky. They have raised their children to be independent with a focus on education. They hope to retire before the age of 65 and want to leave as much of their wealth to their children and possibly grandchildren.
A. Identify the liquidity, time horizon, and unique circumstance constraints.
B. Formulate the Return and Risk Objective for the first year ONLY.