The Case of Chaudhry

Usman Aslam, an investment adviser for Pak Investment Securities Ltd. had just met with a
potential new client, Ilyas Chaudhry. Chaudhry had recently met with an independent, self-
employed investment counsellor but was wondering whether instead, to establish a relationship
with an investment adviser at a well-known and reputable firm. A friend of Chaudhry’s, and a
current client of Aslam’s, had suggested that Chaudhry contact Aslam for an initial discussion
and sharing of ideas. Aslam’s task was to help Chaudhry develop an investment policy statement
and to provide advice regarding an initial asset allocation consistent with the investment policy
statement.

Chaudhry Ilyas
Chaudhry Ilyas was a senior vice-president of client relations at Metroos, a Pakistani retail chain
headquartered in Karachi. Chaudhry has been with Metroos from the founding days 25 years ago
and a key member of the management. Last year, Metroos became a publicly-traded company,
with an initial listing on the Pakistan Stock Exchange (PSX). Since then, the company’s stock
had closely tracked the market index performance. Chaudhry currently owned approximately
PKR 2.5 million of Metroos stock and had no intention of selling his stock in the near term.
Chaudhry was age 55, and in good health. He had two boys who were in their A Levels first and
second year respectively. Both were planning to attend university out of city in Lahore. He had a
salary of PKR 2.0 million and accumulated individual savings of PKR 3.5 million as well as a
Pension Fund Plan (PFP) of PKR 40 million. Almost all of the PFP investments were in a variety
of savings accounts, short-term certificates of deposit (CDs) and guaranteed investment
certificates (GICs) with maturities less than three years. Chaudhry had a defined contribution
plan, whereby he contributed five per cent of his salary each year, which was matched by the
firm’s contribution. Over the past 25 years, his pension fund had grown to 6.5 million. In this
PFP was able to decide how to allocate the total contributions and could change allocations at
month-end. The choices he had were money market, fixed income, commodities and equity asset
classes with a proportion also in non-Pakistani equities as well. Currently his whole PFP was
invested in in money market. Chaudhry also owned an apartment which was recently valued at
PKR 4.5 million.

INITIAL MEETING
During their initial meeting, Chaudhry indicated that he was seeking advice regarding the asset
mix of both his personal savings as well as his PFP and corporate pension. Aslam was able to
obtain some additional information related to Chaudhry’s objectives. His goal was to earn a nine
per cent total return per year. Aslam helped his assess his risk preferences and it was concluded
that he could accept the possibility of up to a 10 per cent (nominal) decline in his portfolio in any
one year (and only a “very small” chance of losses greater than this). Aslam examined internal
research reports from his firm’s economic department that indicated that inflation was projected
to be in the three per cent range for the foreseeable future.

PREVIOUS ADVICE
Chaudhry also showed Aslam the proposal provided to his from the independent investment
counsellor, who had suggested the asset mix in “A” in Exhibit 1. The recommended portfolio
included a 25 per cent allocation in money market funds, 10 per cent in corporate bonds, 35 per
cent in PSX stocks, and 30 per cent in international stocks.

ANALYSIS AND RECOMMENDATION

In order to help Chaudhry understand the importance of the asset mix decision, Aslam created
four additional hypothetical portfolios, indicated in Exhibit 1 as “B” through “E.” Utilizing
expected returns (as indicated in the exhibit as E(R)), asset class standard deviations (as
indicated in the exhibit as SD), as well as an estimate of the correlations among asset classes (not
included in the exhibit), Aslam calculated both the projected total annual return and expected
standard deviation for each portfolio.
Aslam wanted to begin his analysis by preparing an investment policy statement for Chaudhry.
The statement would include both return requirements as well as risk tolerance objectives. The
statement would also include any constraints that Chaudhry was facing including factors such as
liquidity, investment horizon, regulations, tax considerations and any other unique
circumstances.
Next, Aslam wanted to provide Chaudhry with a fair critique of the independent investment
counsellor’s proposal in mix “A.” In addition, considering only the alternative proposals “B”
through “E,” Aslam wanted to indicate to Chaudhry which of the four proposals met or exceeded
his return objective as well as his risk preference. He then wanted to recommend and justify one
suggested asset mix (from “B” through “E”).
 Exhibit 1
Asset Mix Proposal

E(R) SD A B C D E
Money market 4% 3% 25% 10% 20% 25% 10%
Corporate bonds 8% 10% 10% 40% 20% 30% 30%
PSX Equities 12.5% 20% 35% 30% 30% 5% 20%
International Equities 12% 15% 30% 10% 10% 40% 30%
Commodities 13% 22% 0% 10% 20% 0% 10%
Projected Total Return ??? ??? ??? ??? ???
Expected Standard Deviation n/a 9.75% 11.00% 8.50% 10.00%