Describe the three components of the risk objective within an investment policy statement and evaluate Kutemerwa's risk capacity based on her financial factors.

The three components of the risk objective in an investment policy statement are:

• Ability to take risk (Risk Capacity)
• Willingness to take risk (Risk Tolerance)
• Need to take risk (Required Return)

Ability to take risk, also known as risk capacity, is an objective measure of an investor's financial capacity to bear investment losses without compromising their financial goals. It is determined by factors such as time horizon, financial resources, and liquidity needs.

• Time Horizon: Kutemerwa is 55 and plans to retire in 7 years, with an expected retirement period of 25 years. This long investment horizon allows for recovery from potential market downturns, increasing her ability to take risk.
• Financial Resources: She has substantial financial resources. At retirement, she will receive R5,780,000 in lump sums (R700,000 tax-exempt, R80,000 taxable, R5,000,000 from CAM stock sale) and currently holds R1,100,000 in a money market fund. Her current after-tax salary covers her living expenses. This significant asset base provides a strong buffer against potential losses.
• Liquidity Needs: While she has future liquidity needs for her daughter's education (R133,000 annually for 7 years starting in 7 years) and an annual donation (R120,000 starting in 6 years), her substantial capital should be sufficient to meet these without forcing the liquidation of growth-oriented assets during market downturns. Her living expenses are expected to grow at 6% inflation, which necessitates investment growth, but her overall wealth provides flexibility.

Based on her long investment horizon and substantial financial resources, Kutemerwa has a high ability to take risk.