Cheung, 32, is single and in excellent health. Her professional salary covers all of her
expenses and allows her to contribute to a variety of tax-deferred retirement accounts
and taxable savings vehicles. Her assets and liabilities as of the end of last year are
shown in Exhibit 2.
Cheung is now seeking investment guidance as she recently inherited $25 million of
Palmyra Pharmaceuticals common stock from her father. This holding will now
represent the bulk of her financial wealth
Cheung stresses to Donovan that she is conservative and does not want to take undue
risks but recognizes that a large, single stock position entails has inherent risk. She
would like to diversify away from Palmyra but lists the following constraints:
• Cheung states that her investment time horizon is presently five years
during which time she does not want to incur any capital gains taxation.
She wants to retain the voting rights of the stock even if she were to
reduce her financial exposure to the position.
• She wants to remove downside risk as much as possible and practical.
• She does not expect to receive any significant capital inflows in the future.
Donovan starts making a list of strategies that he might consider in advising Cheung,
coming up with the following list for the Palmyra holding.
• Outright sale
• Staged diversification
• Completion portfolio
• Equity monetization
• Covered call writing
• Exchange fund
• Charitable remainder trust
The explanation under completion portfolio (for not being chosen) is: “No other assets available”.
Could someone please explain why? There are other assets available, actually, however, there are no other assets that could be contained in the benchmark, so that, when adding a completion portfolio, there would be no exposure to “replicate” versus the benchmark? Thanks!