Formulate the time horizon, willingness to take risk, and overall risk tolerance constraints in Kutemerwa's investment policy statement.

Here are the responses to the questions:

b. Willingness to take risk
Willingness to take risk is a subjective measure of an investor's psychological comfort with potential investment losses. Kutemerwa's financial security, with her salary covering living expenses and substantial assets, suggests she is not overly concerned about short-term market fluctuations impacting her lifestyle.
Justification: Her current after-tax salary of R1,200,000 covers her living expenses, which reduces the psychological pressure to avoid investment losses for immediate needs, indicating a high willingness to take risk.

c. Overall risk tolerance
Overall risk tolerance combines an investor's ability to take risk (objective) and their willingness to take risk (subjective).
Justification: Given her high ability to take risk (long time horizon, substantial assets) and her high willingness to take risk (financial security), Kutemerwa's overall risk tolerance is high.

(iii) Formulate each of the following constraints in Kutemerwa's investment policy statement and justify each of your responses with one reason based on Kutemerwa's specific circumstances.

a. Time horizon
Constraint: Time horizon refers to the length of time over which an investor's funds are expected to be invested.
Justification: Kutemerwa has a long multi-stage time horizon of 32 years (7 years pre-retirement and 25 years in retirement), which allows her portfolio to recover from short-term market volatility.

b. Tax
Constraint: Tax considerations relate to the impact of various taxes (income, capital gains, etc.) on investment returns.
Justification: Kutemerwa's income tax rate of 30% means that investment income and capital gains will be subject to significant taxation, making tax-efficient investment strategies important.

c. Liquidity
Constraint: Liquidity refers to the need for cash at specific points in time.
Justification: Kutemerwa has significant future liquidity needs for her daughter's university education (R133,000 annually for 7 years starting in 7 years) and an annual charity donation (R120,000 starting in 6 years).