Investment Policy Statement

1

Table of Contents

Executive Summary: .................................................................................................................................. 2

Purpose: .................................................................................................................................................. 2

Client’s Portfolio Profile (Fi360, Inc., 2012): ....................................................................................... 3

Client’s Non-Retirement Asset Allocation Matrix: .............................................................................. 3

Target Breakdown: ................................................................................................................................. 4

Legal Oversight and Policy Fiduciary: ................................................................................................. 4

Legal Oversight: ................................................................................................................................. 4

Policy Fiduciary: ................................................................................................................................. 4

Statement of Objectives ............................................................................................................................ 5

Background: ............................................................................................................................................ 5

The objectives of the portfolio are: ...................................................................................................... 5

Time Horizons: ........................................................................................................................................ 6

Risk Tolerance: ....................................................................................................................................... 6

Performance Expectations: ................................................................................................................... 6

Duties and Responsibilities ....................................................................................................................... 7

Founder and Firm Advisors: ................................................................................................................. 7

Investment Advisor: ............................................................................................................................... 7

Exhibit 2: Asset Class Guidelines ............................................................................................................ 7

Rebalancing of Strategic Allocation (%): ................................................................................................ 8

Implementation ........................................................................................................................................... 9

Exhibit 4: Monitoring – Benchmarks ........................................................................................................ 9

Monitoring – Watch List Criteria for Various Fund Assets ................................................................. 10

Asset’s Expenses (where qualified): ................................................................................................. 10

Asset’s Performance: ........................................................................................................................... 10

Asset’s Risk: .......................................................................................................................................... 10

Asset’s Operations (where qualified): ............................................................................................... 10

Investment Policy Review ....................................................................................................................... 11

Portfolio Rebalance and General Status Update for July 5, 2012: ............................................... 13

Final Assessment and Conclusion: Rebalancing Status Update for August 2, 2012 ................ 16

Appendix – Capital Market Inputs .......................................................................................................... 25

Appendix A: Assumptions, Methodologies, and Financial Models ................................................... 35

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Executive Summary:

Purpose:

This investment portfolio is “client-specific (i.e., high-end individual, consolidation-phase

investor)” and is designed to optimize moderately-aggressive to highly-aggressive investment

strategy a duration of no fewer than 10 years, but no greater than 25 years, for which includes

the 25th year of the portfolio agreement. In order to maximize desired performance ratios, this

agreement (referred to as the Investment Policy Statement) between Mr. Giancarlo Peccadillo

(Client) and Msverde Capital Asset LLC (Capital Asset Managing Entity) is prescribe exclusively

of global diversifiable assets comprised and categorized in the following general assets

allocation classes: U.S. Cash and Cash Equivalents, U.S. and Foreign Government and U.S.

and Foreign Corporate Bonds, U.S and Foreign Mutual and Exchanged-Traded Funds, U.S. and

Foreign Preferred and Common Stocks, U.S. and Foreign Real Estate, and U.S. and Foreign

Commodities. The short-term, primary objective for said client is to continue current

accumulation of capital investment under the existing portfolio plan with slow to medium rapid

integration and phase in to Msverde Capital Asset’s proposed Strategic III Non-Retirement

Target plan. The long-term secondary objective is to be substantially financially viable enough to

move smoothly from consolidation phase to spending phase of the proposed plan, with most, if

not all, personal expenditures - including discretionary - during the entire course of the client’s

retirement phase, remunerated by interest-bearing, or dividend-bearing, fixed income. All

underlying capital assets (referred to here as “principal”) will continue under the proposed

Strategic III Non-Retirement plan with the sole purpose of maximizing overall investment

portfolio value for pass-through inheritance purposes. Interest/dividends generated by these

underlying principal assets will be extracted and distributed into alternative investment

instruments (e.g., bond funds, ETF, REITS, short-term MMAs, Convertible Roth IRAs, etc.) in

full compliance and satisfaction of Mr. Peccadillo and his preferred and accepted list of

approved custodians addendum to this agreement.

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Client’s Portfolio Profile (Fi360, Inc., 2012):

Client Name: Giancarlo Peccadillo Client Type: Individual - Executive Client Subtype: Private Investor, Non-Retiree: Age 34 Fiduciary Standard of Care: Registered Investment Advisers (RIA), under the auspices of

Investment Advisers Act (IAA) of 1940 and the U.S Securities Exchange Commission (SEC)

and the International Organization of Securities Commissions (IOSC)

State of Domicile: CA Tax Id: N/A Current Assets: $1,000,000 Modeled Annualized Return: 8.5%; Expected 10-Year Cumulative Range: 50% – 130% 1-Yr Loss Limit (Worst case scenario): -2.7% "Safe Harbor" Compliance Options: U.S. – EU Safe Harbor, U.S. – Switzerland Safe Harbor,

and the Asia Pacific Economic Cooperation Privacy programs, all under the guidance of the

U.S. Department of Commerce (DOC) and the Federal Trade Commission (FTC)

Client’s Non-Retirement Asset Allocation Matrix:

Exhibit 1: Asset Allocation Matrix Non-Retirement Goals Matrix

Your Time Horizon

3-5 Years 6-10 Years 11+ Years

Yo

ur

Ris

k

To

lera

nce

Higher Strategy 2 20% cash 40% bonds

40% stocks

Strategy 3 10% cash 30% bonds

60% stocks

Strategy 5 100% stocks

Moderate Strategy 1 30% cash 50% bonds

20% stocks


40% stocks

Strategy 4 20% bonds 80% stocks

Lower All Cash 100% cash


20% stocks

Strategy 3 10% cash 30% bonds 60%

stocks

4

Target Breakdown:

Non-Retirement Target Spectrum (Functionally Aggressive): Strategic III 6 to 10-

Year Plan

General Asset Allocation Composition Matrix (Non-Subdivided): Cash = 10%;

Bonds = 30%; Stocks = 60%

Legal Oversight and Policy Fiduciary:

Legal Oversight:

“This Investment Policy Statement should be reviewed by an attorney knowledgeable in this

specific area of the law. Any change to this policy should be communicated in writing and on a

timely basis to all interested parties. If any term or condition of this Investment Policy Statement

conflicts with any trust and/or plan document, the document shall control, as long as such term

or condition is consistent with the law.”

Policy Fiduciary:

1. Written language in the IPS should clearly state and clarify the client and advisor’s

guidelines, goals and objectives, expectations, and dispositions regarding all of the portfolio

assets.

2. Reasonable and consistent open communication between client and all parties should be

strongly engaged in all investment decisions.

3. A continuum of performance analyses should sustain and subsist, ensuring proper portfolio

rebalancing at appropriate timing to maximize short- and long-run returns.

4. Full compliance with and adherence to all applicable laws and governing rules and

regulations instituted by various local, state, federal, and international ruling parties that

could adversely or favorably influence portfolio performance.

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Statement of Objectives Background:

Msverde Capital Assets (aka, “MCA”) was established on September 12, 2001. Since

then, the firm has far exceeded returns on investments which has outpaced most in its industry

and also has outperformed effectively well leading global indices. Currently, with total

investment capitalization held at $36 billion, the firm has enjoyed a five-year cumulative average

anywhere between 85% - 110% return on investments for its clients. Even in a down market,

reinvestment proceeds from poorly performing assets have delivered one-year PORR

(profitability on reinvestment replacement) returns of 11%, which approaches the historical 12-

14 percent annual rates of return overall portfolio performance during the past few recessive

years. The firm is confident, as will be clearly outlined and describe in this IPS, that upward

market trends are steadily accelerating and that future market conditions should begin to regain

virility.

The primary mission objective for this personal investor portfolio is long-term growth.

The construction of this IPS was designed by the founder and his team of subcommittees

encompassing a wide range strategic investment policies for which all decision makers deem as

the decisive and appropriate investment process. This structural process which is consistent

with all other forms of investment portfolios generated by the firm provides various asset classes

under different tactical management options for the sole purpose of maximizing diversification to

attain optimal peak portfolio performance that is in line with expected portfolio risk and return.

The objectives of the portfolio are:

To effectively manage the purchasing power of the investor’s current assets and all of his or

her future contributions congruently with inflation.

To sustain the highest degree of programs and services which can only be achieved through

the reinvestment of adequate portfolio total return and new contributions that counteract cost

hikes and extension of existing program.

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Under reasonable and acceptable levels of risk, maximize portfolio return.

Ensure the control of effective and efficient asset allocation predicated on overall IPS total

return initiative that corresponds in full concurrence explicitly with an adjustable contribution

schedule that remains potentially susceptible for realized positive returns.

Time Horizons:

The investment guidelines are based upon an investment horizon of greater than five

years. The portfolio's strategic asset allocation is also based on this long-term perspective.

Short-term liquidity requirements are anticipated to be highly relevant and should be covered by

partial proceeds from the sale of underperforming assets during asset allocation rebalancing

activity (Fi360, Inc., 2012).

Risk Tolerance:

Msverde Capital takes into account that some risk must be assumed to attain preferred

rate of return for the Portfolio. Therefore, to effectively respond to this risk assumption

associated with uncertainty and sudden negative fluctuations within any given market, we have

constructed a risk-tolerance methodology to assure proper counteractive measures are in place

to mitigate both short-term and long-term losses. Based on current preliminary analysis of the

suggested assets proposed, we calculated that a 1-yr. aggregate loss on returns for the

Portfolio should be held at -2.7% (Fi360, Inc., 2012).

Performance Expectations:

In accordance to our calculations which assumes and falls under our strict risk tolerance

methodology, the desired investment objective is to achieve an annualized long-term rate of

return for the Portfolio that is at least 7.59%. The target rate of return for the Portfolio has been

based upon the assumption that future real returns will approximate the long-term rates of return

experienced for each asset class in the IPS. In reiteration, we recognize that market

performance varies and a 7.59% expected annual rate of return which assumes uncertainty

related to business risk, geopolitical risk, risk associated with acts of God and human events,

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risk pertaining to fiscal and monetary policy adjustments, and precedent of economic anomalies

may not generate returns consistent with our targeted goal of greater than 7.59%. As illustrated

in Exhibit 4 these qualifying benchmarks will serve as complementary performance measures to

gauge and assess individual assets and overall Portfolio performance on a quarterly basis over

time (Fi360, Inc., 2012).

Duties and Responsibilities Founder and Firm Advisors: As fiduciaries under the portfolio, the primary responsibilities of the founder and advisors are: 1. Prepare and maintain this investment policy statement

2. Prudently diversify the portfolio’s assets to meet an agreed upon risk/return profile.

3. Prudently select investment options

4. Control and account for all investment, record keeping and administrative expenses

associated with the portfolio

5. Monitor and supervise all service vendors and investment options

6. Avoid prohibited transactions and conflicts of interest

Investment Advisor:

The Investment Advisor serves as an objective, third-party professional retained to assist

the Mr. Giancarlo Peccadillo, the “Client,” in managing the overall investment process. The

Advisor, a representative under management for Msverde Capital Assets, the “Employer,” is

obligated to carry out the responsibilities and guidelines prescribed in in the previous section in

accordance to the Asset Class Guideline matrix illustrated below (Fi360, Inc., 2012).

Exhibit 2: Asset Class Guidelines

Cash and Cash Equivalents

U.S. and Foreign Stocks

U.S. and Foreign Bonds

U.S. and Foreign Real

Estate

U.S. and Foreign Commodities/Futures

Money Market:

Large Cap Individual

Mid Cap Individual

Small Cap

Government Notes: Intermediate-Term:

Government

Real Estate Individual

Precious Metals and Minerals

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Individual Treasuries: Long-Term:

Certificates of Deposits:

Large Cap Preferred

Mid Cap Preferred

Small Cap Preferred

Corporate Investment-Grade: Intermediate:

Corporate Investment-Grade: Long-Term:

REITS

Oil and Natural Gas

U.S. Treasury Bills (T-Bills) Funds:

Large Cap ETF

Mid Cap ETF

Small Cap ETF

Exchanged-Traded Funds:

Mutual Funds:

Rebalancing of Strategic Allocation (%):

The percentage allocation to each peer group may vary depending upon market

conditions. Please reference the allocation table (Exhibit 3) below for the lower and upper limits

for each peer group. When necessary and/or available, cash inflows/outflows will be deployed in

a manner consistent with the strategic asset allocation and allocation ranges of the portfolio. If

there are no cash flows, the allocation of the portfolio will be reviewed quarterly. If the

committee judges cash flows to be insufficient to bring the portfolio within the target allocation

ranges, the committee shall decide whether to effect transactions to bring the allocation of

portfolio assets within the arbitrary threshold ranges (Fi360, Inc., 2012).

Exhibit 3: Strategic Allocation Rebalancing Matrix Peer Group – Stocks Strategic Allocation Lower Limit Upper Limit

US Large Cap (Individual) 9.0% 8.0% 12.0% US Mid Cap (Individual) 3.5% 2.5% 5.5% US Small Cap (Individual) 1.5% 1.0% 2.0% Foreign Large Cap (Individual) 2.0% 1.5% 2.5% Foreign Mid/Small Cap (Individual)

0.5% 0.5% 1.5%

Preferred Stock (Individual) 7.0% 6.0% 9.0% Exchanged-Traded Funds 16.5% 16.0% 19.5% Mutual Funds 10.0% 8.0% 12.0%

Peer Group – Bonds Strategic Allocation Lower Limit Upper Limit US Government Long-Term Bond

1.0% 0.5% 1.5%

US Government Intermediate Bond

1.0% 0.5% 1.5%

US Government Short-Term 5.0% 4.0% 8.0% Foreign G-Intermediate-Term Bond

0.5% 0.0% 1.5%

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Foreign G-Short-Term Bond 0.5% 0.0% 1.5% US Corporate Long-Term Bond 1.0% 0.5% 1.5% US Corporate Intermediate Bond

1.0% 0.5% 1.5%

US Corporate Short-Term 4.0% 3.5% 7.5% Foreign C-Intermediate-Term Bond

0.5% 0.0% 1.0%

Foreign C-Short-Term Bond 0.5% 0.0% 1.0% Peer Group – Real Estate Strategic Allocation Lower Limit Upper Limit

US Real Estate (Residential/Commercial)

3.0% 1.5% 6.5%

International Real Estate (Residential/Commercial)

1.0% 0.5% 1.5%

US Exchanged-Traded Funds (Residential/Commercial)

3.5% 3.0% 7.0%

International Exchanged-Traded Funds (Residential/Commercial)

1.5% 0.5% 3.0%

US REITS 4.5% 4.0% 8.0% Foreign REITS 1.5% 1.0% 2.0%

Peer Group – Commodities Strategic Allocation Lower Limit Upper Limit Precious Metals and Minerals 4.0% 0.0% 8.0% Oil and Gas 4.0% 2.5% 6.5%

Peer Group – Cash and Cash Equivalents

Strategic Allocation Lower Limit Upper Limit

MMA, CD, and Cash 12% 10% 14%

Implementation

Management of each portfolio asset should be conducted by a (1) registered portfolio

adviser, (2) preferred banking institution, (3) preselect, corporate-approved insurance company,

and (4) registered investment company.

Exhibit 4: Monitoring – Benchmarks

Peer Group – Stocks Benchmark Peer Group – Real Estate Benchmark

Common Large Cap (Individual) Common Mid Cap (Individual) Common Small Cap (Individual) Preferred Stock (Individual) Exchanged-Traded Funds

NYSE, NASDAQ, S&P 500, Nikkei, DAX, CAC,

Real Estate (Individual) REITS

US Dow Jones Real Estate, FTSE EPRA/NAREIT, Guggenheim Real Estate

Peer Group – Bonds Benchmark Peer Group – Commodities Benchmark

Long-Term Bond Intermediate Bond Short-Term

Barclays Capital Aggregate Bond, Merrill Lynch Domestic Master, Salomon Smith Barney World Government Bonds,

Gold Silver Oil and Gas

Dow Jones-UBS Commodity, World Bank Commodity, Goldman Sachs Commodity, S & P Commodity, Rogers International

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J.P. Morgan Emerging Markets Bond

Commodity, AMEX

Monitoring – Watch List Criteria for Various Fund Assets

Financial advisor’s termination decisions for underperforming investment options cannot

be made exclusively by standardized formulas. All fund options listed on the Portfolio’s “Watch

List” in Exhibit 6 must be periodically analyzed on a quarterly cycle to evaluate current returns

as they are compared and contrasted against both intermediate- and long-term historical

returns. Msverde Capital recognizes that unforeseen short-lived market anomalies may occur

and significantly impact a fund performance, and, therefore, these events are taken into

consideration during the Watch List evaluation process. The following 4 criteria are critical

components used during the termination evaluation process (Fi360, Inc., 2012):

Asset’s Expenses (where qualified): Portfolio Mean Expense Ratio - Active Management (qualifying mutual funds): Not to exceed 1.025% Asset’s Performance: 10 Year Average Return (@ 10% growth rate): 48.49%

5 Year Average Return (@ 7% growth rate): 19.64%

3 Year Average Return (@ 7% growth rate): 17.15%

1-Year Average Negative Threshold Limit: -2.7%

Asset’s Risk: Standard Deviation: 5.60% Asset’s Operations (where qualified): Inception Date (mutual funds): No fewer than 10 years in existence Manager Tenure (mutual funds): At least 7 years

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Investment Policy Review

Current Status: Period 5/22/2012 through to 8/02/2012

Graph 1: Portfolio Performance Overview Snapshot, As of August 3, 2012

Graph 2: First Quarter Portfolio Overall Performance Results against Selected Indices:

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

5/2

2/2

01

2

5/2

9/2

01

2

6/5

/20

12

6/1

2/2

01

2

6/1

9/2

01

2

6/2

6/2

01

2

7/3

/20

12

7/1

0/2

01

2

7/1

7/2

01

2

7/2

4/2

01

2

7/3

1/2

01

2% Y

ield

Msverde Capital Assets vs. Selected Indices: Period 5/22/2012 through 8/02/2012

Msverde Capital-HPY

S&P 500-HPY

DJIA-HPY

DASDAQ-HPY

Nikkei 225-HPY

DAX-HPY

Russell 2000-HPY

FTSE 100-HPY

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Graph 3: Msverde Stock-Trak Portfolio Performance Overview: May 1 to June 25, 2012 (Stock-Trak, Inc., 2012)

The previous chart shows MCA’s performance for the period indicated has correlated, in

large part, systematically with price movements from a few of the world’s leading indicators.

Because of this parallel market efficiency between the client’s portfolio and those indexes, it will

enable the client’s primary adviser to increase active management activity for strategic

diversification purposes, ultimately mitigating overall portfolio risk. As of August 3, the projected

annualized average return for the portfolio is 14.23%. The current standard deviation has been

estimated at 5.60%. Assuming an annual risk-free rate (RFR) of 2.75%, utilizing the Sharpe

Ratio model (defined as S = Portfolio Average Return minus RFR divided by Portfolio Standard

Deviation) which measures average returns per unit of risk. The higher the ratio, or multiple,

means the greater probability that the portfolio is properly diversified and thus has eliminated

unsystematic risk that is associated with those factors involved with each individual asset. After

calculation was executed, the current Sharpe Ratio is 2.01, which is favorable.

To explain and illustrate the combinative effects of risky assets to risk-free assets (e.g.,

Treasuries, Municipals, etc.), the adviser calculated the estimated return for the portfolio by

adding the product of the weight of the risk-free asset and the product of expected return of the

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portfolio and 1 minus the weight of the risk-free asset. For the period ending July 5, the E (R

port) was estimated at 3.94%, while the E (R port) for the period ending August 3 was estimated at

minus 10% at 3.84%. The decline in return can be attributed to both underperforming large cap

common stock and instability in commodity prices, specifically precious metals, which saw a

depreciable decrease in value of the assets.

This concludes the opening portion of this status report overview for the current

positioning of the investment portfolio. The information provided in subsequent pages will first

outline the various components in the investment policy statement (IPS) between the client and

Msverde Capital Asset and describes and explains processes and procedures taken to

maximize investor’s return through active management and rebalancing techniques. (It should

be noted that although improvements in overall portfolio performance can be enhanced by

active management, due to the unpredictable nature of the global marketplace and

corresponding risk factors caused by abnormal or unanticipated adverse events, average

annual returns might not fulfill desired expectation.)

The report is divided into two segments (or periods): The first extending from May 22,

2012 to July 5, 2012 – Portfolio Rebalancing and General Status Update - and the second

beginning on July 6, 2012 and ending on August 3, 2012 – Final Assessment and Conclusion:

Rebalancing Status Update. All statistical analyses were conducted using data and information

from May 22 to August 3.

Portfolio Rebalance and General Status Update for July 5, 2012:

Project Phase Objective: The primary purpose of this exercise is to execute a thorough mid-

term assessment of the candidate’s investment portfolio to analyze overall performance and to

determine if any part of the investment portfolio fails to meet satisfactorily all criteria and

requirements stipulated in the investment portfolio original policy statement. The results in this

analysis report only covered various samplings of the overall investment portfolio, due to limited

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data key to performing proper statistical and analytical work used in the report. (Please

observe and review appendix for supporting materials.)

The specific assets used in the samplings that were used to provide a non-

comprehensive yet functional progress report are individual U.S. and foreign common stocks,

U.S. and foreign preferred stocks, and real estate stocks. Assets performances (i.e., % annual

rate of returns) were compared against selected benchmark indices (on a percentage points

based), such as the NYSE, NASDAQ, S&P 500, Nikkei, Deutsche Boerse (DAX), and London

Stock Exchange (LSE). In the aforementioned graph (Graph 3) of this report illustrates

Msverde’s overall portfolio performance during the firsts segment from a period spanning May 1,

2012 to June 25, 2012. Subsequent graphs (Graphs 2 and 3) in the appendix demonstrate a

few of the leading indexes’ overall performances for the same period, with NYSE used as the

base index.

First preliminary assessment of the report in the early stages of the asset selection

process and initial performance phase did see some favorable appreciable outcomes in the

candidate’s portfolio, which based most decision-making on a priori experience, visual trending

based on various analyst graphs and reports, and various forecast assumptions such as change

in future political climates, current momentum economic indicators in consumer spending

behavior, known historical indicators that typically are progenitors of improvements in the

economy such as an uptick in average home prices and commercial real estate, decline in gold

and oil prices, strengthening U.S currency rates against developed and developing economies,

an appreciable shift in interest rates, and a few others. These risk multi-factors served as the

basis for early portfolio selections.

The main sample that will be discussed in this report to give one an idea what

procedures are taken into account to evaluate each peer group of the portfolio and to determine

where, if any, asset re-allocation or rebalancing will be required to maximize overall

performance through those adjustments will focus on the performance of preferred stocks. The

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five stocks used for the data and statistical analyzes were BBC Capital II 8 1/2 (BBXT) -

NASDAQ: Non-Convertible, Taylor Capital GRP 9 (TAYCP) - NASDAQ: Non-Convertible, ING

GROEP 7 3/8% PE (IDG) - NYSE: N/A, Popular Cap TR I 6.1 (BPOPN) - NASDAQ GS: Non-

Convertible, and Deutsche Bank Cap FDX 7.35 (DCE) - NYSE: Non-Convertible.

Although the major of the stocks have performed well in this peer group, two specific

stocks stood out as underperforming assets – indicated by listed symbol BBXT and TAYCP -

during the period, which can be explained by the negative correlation coefficients described in

the multiple regression chart (see Appendix: Figure No. 1). 81.18% of the variability in NYSE

index volume is explained by the variations in the stock prices for the preferred stocks. This

statistical relationship is substantial enough to proceed to step two of the rebalancing evaluation

phase for preferred stocks to determine which ones would be considered for sale in order to cut

losses and use the proceeds to investment in more favorable assets.

After graphing a regression scatter line fit plot (see Appendix: Figures 3-7), the results

clearly show both a neutral and negative linear line relationship against the benchmark index

(NYSE) with the two assets in question. Furthermore, when one view the correlation coefficient

between the assets themselves (see Appendix: Figure No. 2) and compare the strongest

relationships with those reflected in the scatter plots, there little surprise that preferred stocks

IDG and DCE not only have a significantly strong positive correlation coefficient relationship of

0.604869 (a strong positive correlation coefficient of 0.759098 occurs between BPOPN and

IDG) but each closing price line fit, in addition to BPOPN’s, slope is positive and moves sharply

upward. It is recommended that both BBXT and TAYCP preferred stock should be sold.

For the purpose of this non-comprehensive report, it is important to state that the

sampling used in this report for the period May 22, 2012 through to July 1, 2012 is typical of the

general financial techniques used for the investment portfolio overall comprehensive and

complete data and statistical analysis. Please that this report includes spreadsheet attachments

to supplement the information disclosed in the report.

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Final Assessment and Conclusion: Rebalancing Status Update for August 2, 2012

For the past three months, beginning on May 6, 2012 and ending on August 2, 2012, the

overall performance of the investment portfolio containing 132 assets performed reasonably well

in which current economic conditions are less than favorable for investors coupled with marginal

activity that is commonly associated with lower peak periods in summer months.

As of the close of business on August 2, overall return on the investment portfolio was

modestly less than 3% (see Graph 1 and Graph 2 Index Comparison) for the three-month

period, which would be annualized to 12%, if all things remain constant and prudent allocation

readjustment is made. Yet, however, when slow-growth market activity is considered and all

risk factors directly and indirectly affecting and impacting global economies, the portfolio has

generated a significant Sharpe ratio, which is indicated of the portfolio’s full diversification and

its ability to spread risk associated with underperforming (% returns) assets equitably

throughout the portfolio in order to optimize overall performance in returns. Once further

rebalancing occurs and underperforming assets are eliminated, following thorough and

complete analysis, the client should recognize a sharp appreciable climb in overall performance

and better-than-industry returns.

Currently, after reevaluating the results of underperforming assets – which are listed in

the chart below (Exhibit 6) – and executing the company’s standard pass/fail asset retainment

procedure, the following decisions were made:

Exhibit 6: Underperforming Assets Chart Investment Portfolio Underperforming Assets

U.S. Individual Stocks –

Large Cap

CMG GD SYK DBK UPS

U.S. Individual

Stocks – Mid Cap

DAL BCR ABM IRM LLL

U.S. Individual

FXCM IBKC ISH LCC

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Stocks – Small Cap

Real Estate PSB WRE

Commodities DVN PTR

1. Including the presence of abnormal negative returns during the period of interest, all of the

underperforming assets did not exceed the portfolio’s annualized negative return threshold

of -2.7%. Therefore, as a result, all underperforming assets will be retained and held.

2. Both Chipotle (CMG) and Deutsche Bank (DBK) were the only two assets to approach the

threshold the closest of the assets at -1.75% and -1.175%, respectively (see Graph 4). It is

recommended by MCA’s lead adviser that they should be categorized as “pending

concerns” in perpetuity until performance either improves or loss is sustained for the full

duration of the year. If the latter, the assets will be sold and eliminated from the portfolio

and all subsequent proceeds from the sale will be strategically used to replace those assets

in the same class, unless abnormal circumstances prevails which will command alternative

usage of allotted proceeds.

3. As is standard procedure for all assets subject to a watch-list status, to ensure the integrity

and optimal maintenance of the client’s portfolio is upheld to the highest degree, all

underperforming assets will carefully be monitored and routinely evaluated. The following

series of graphs provide an illustration of the performance yield for each major asset class

for the time period stretching from May 9 to August 3.

4. If it is determine that an underperforming asset(s) is viewed to have forward-looking intrinsic

value through observation and evaluation of favorable base-line core fundamentals (i.e., BV,

ROA, Inventory Turnover, Receivable Turnover, Revenue-to-Employee, Acid Test, Current

Ratio, Operating and Profit Margins, etc.), then MCA prescribes the incorporation of hedge

utilization through multiple put-call parity operations to capture potential profits from

declining prices that could offset poor performing assets.

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The two most volatile asset classes were real estate and commodities (see Graphs 7

and 8). To avoid long-term losses, it is recommended that both classes are observed closely

and that a first-degree contingency plan be drafted and attached to the IPS as an addendum.

Aside for momentary price fluctuations in the earlier stages of the period for underperforming

assets, U.S. Large Cap, Mid Cap, and Small Cap stock experienced very minor average price

swings, which is reflected in Graphs 4, 5, and 6. But as mentioned before, Graphs 7 and 8 for

real estate and commodities, respectively, display huge signs of volatility, demonstrated by wide

price change intervals for the same period.

Graph 4: Underperforming Assets – Large Cap

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Graph 5: Underperforming Assets – Mid Cap

Graph 6: Underperforming Assets – Small Cap

20

Graph 7: Underperforming Assets – Real Estate

Graph 8: Underperforming Assets – Commodities

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It should not come to any surprise that when one observes the correlation coefficient

table below, it becomes obvious that many of the higher correlations (for the purpose of this

report, r ij > 60%) are noticeable mainly between assets from the real estate and commodity

classes. For example, according to the chart below (Figure 1), DVN (Devon Energy) and PTR

(PetroChina) and PSB (PS Business Parks) and WRE (Washington REIT) and not only strongly

correlated among themselves but with other underperforming assets whose annualized returns

approaches the IPS’s lower return limit of -2.7%. These among other trends, if adequately

monitored, will help preempt both possible short-term and long-term disruption in overall

performance, as rebalancing becomes pivotal in the eradication of poorly performing assets.

Figure 1: Correlation Coefficient for Underperforming Assets

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Graph 9: Underperforming Assets – Commodities

Closing Comments and Remarks:

In reiteration, all things being considered, the portfolio has performed well and should

reveal substantial increases in higher limit returns, as market corrections continues to improve

in various global economies. There are already noticeable signs from recent increases in

capital expenditures by several Fortune 500 companies, as confidence begins to heighten and

new projects begin to emerge. Since a majority of the larger enterprises either serve or sponsor

smaller business entities, the reciprocating effects of these actions will definitely improve market

conditions and investors should begin seeing positive residual ramification from this and other

such-similar economic drivers. Henceforth, forward momentum generated by an acceleration in

commercial and consumer spending should build a better platform for profitability and higher

rates of return. Once these events engage, MCA advisers are prepared and position to

23

implement the phase II strategic rebalancing plan to better respond to aggressive growth and

capitalize immediately on the opportunities that belies a healthier marketplace. MCA is

committed and dedicated in offering premium service for its clients, because they deserve it.

Hereby, MCA affirms that the information contained within this report has been validated

and approved by MCA executive committee and lead adviser, in accordance to the company’s

bylaws and laws of local, state, and federal governing bodies. To the best of knowledge, all

information pertinent to the investor’s right for full disclosure and for which is stipulated within

this investment policy statement (IPS) and performance report has been clearly stated,

communicated, and explained to the investor, including but not limited to auxiliary functions and

corresponding costs such as standard management and maintenance fees, commissions, etc.

MCA is obligated to provide premium investment service and to use its expertise to develop,

design, and implement various strategic methodologies in its analysis to assuage or eliminate

risk entirely through countermeasure such diversification, hedging, etc., that will maximize

profitability and overall portfolio performance. Lastly, it should also be duly noted that the

investor nor its adviser may or may not be able to anticipate or predict uncertainty and those

events which may or may not adversely affect overall performance of the IPS and should take

into account this risk assumption during the length of the contract.

Prepared by: Signature

Msverde Capital Assets, LLP, MCA®

MCA Advisors 10 Coventry Place Suite 2001 Fairfax CA 94930 Name Position Signature M. Scott Green, President

24

Reference

Dow Jones & Company, Inc. (2012). Wall Street Journal: Marketdata. Retrieved May 26, 2012,

from http://online.wsj.com/mdc/public/page/marketsdata

Dow Jones & Company, Inc. (2012). Wall Street Journal: Marketdata. Retrieved May 26, 2012,

from http://online.wsj.com/mdc/public/page/marketsdata

Fi360, Inc. (2012). Home: Resources. Retrieved May 26, 2012, from

http://www.fi360.com/main/contact.jsp

MarketWatch, Inc. (2012). Research. Retrieved May 26, 2012, from http://www.marketwatch.com/

Mergent.com (2012). Mergent Online Search. Retrieved May 26, 2012, from http://0-

online.mergent.com.library.ggu.edu

MorningStar, Inc. (2012). Investment Research Center. Retrieved on May 26, 2012, from

http://0-library.morningstar.com.library.ggu.edu/

NASDAQ, Inc. (2012). NASDAQ OMX: Quotes and Research. Retrieved May 26, 2012, from

http://www.nasdaq.com/

OneSource Information Services, Inc. (2012). OneSource.com: Company Summary Report.

Retrieved May 26, 2012, from http://0-online.onesource.com.library.ggu.edu

ProQuest, LLC. (2012). ProQuest: Statistical Datasets. Retrieved May 26, 2012, from

http://www.lnstatistical.com/Main.jsp;jsessionid

Standard & Poor’s (2012). S&P Capital IQ: NetAdvantage. Retrieved May 26, 2012, from

http://0-www.netadvantage.standardandpoors.com.library.ggu.edu

Standard & Poor’s Financial Services LLC. (2012). Home: Quotes. Retrieved May 26, 2012,

from http://www.standardandpoors.com/home/en/us

Stock-Trak, Inc. (2008-2012). Stock-Track: My Portfolio. Retrieved May 22, 2012, from

http://www.stocktrak.com/private/account/portfolio.aspx

Yahoo, Inc. (2012). Yahoo Finance. Retrieved May 26, 2012, from http://finance.yahoo.com/

http://online.wsj.com/mdc/public/page/marketsdata

http://online.wsj.com/mdc/public/page/marketsdata

http://www.fi360.com/main/contact.jsp

http://www.marketwatch.com/

http://0-online.mergent.com.library.ggu.edu/

http://0-online.mergent.com.library.ggu.edu/

http://0-library.morningstar.com.library.ggu.edu/

http://www.nasdaq.com/

http://0-online.onesource.com.library.ggu.edu/

http://www.lnstatistical.com/Main.jsp;jsessionid

http://0-www.netadvantage.standardandpoors.com.library.ggu.edu/

http://www.standardandpoors.com/home/en/us

http://www.stocktrak.com/private/account/portfolio.aspx

http://finance.yahoo.com/

25

Appendix – Capital Market Inputs

Investment Portfolio Preferred Stocks Statistical Analysis: Multiple Regression

Figure No. 1:

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.81179897

R Square 0.659017568

Adjusted R Square

0.600227494

Standard Error 183.7415896

Observations 35

ANOVA

df SS MS F Significance F

Regression 5 1892247 378449.5 11.20967 4.43248E-06

Residual 29 979068.2 33760.97

Total 34 2871316

Coefficients Standard Error

t Stat P-value Lower 95% Upper 95% Lower 95.0%

Upper 95.0%

Intercept 1970.565681 10759.78 0.183142 0.855961 -20035.6613 23976.79 -20035.7 23976.79

BBXT Closing Price

209.4672066 300.513 0.697032 0.491333 -405.150788 824.0852 -405.151 824.0852

TAYCP Closing Price

-375.4413719 163.1446 -2.30128 0.028755 -709.1096 -41.7731 -709.11 -41.7731

IDG Closing Price 216.7847172 73.4962 2.949605 0.006234 66.46811488 367.1013 66.46811 367.1013

BPOPN Closing Price

476.467875 194.6116 2.448301 0.020639 78.44244899 874.4933 78.44245 874.4933

DCE Closing Price

-81.52681605 102.5406 -0.79507 0.433033 -291.245887 128.1923 -291.246 128.1923

Figure No. 2:

Preferred Stock Correlation

BBXT Closing Price TAYCP Closing Price

IDG Closing Price

BPOPN Closing Price

DCE Closing Price

BBXT Closing Price 1 TAYCP Closing Price

0.205774147 1

IDG Closing Price -0.181410973 0.385325 1 BPOPN Closing Price

-0.251875729 0.250434 0.759098 1

DCE Closing Price -0.062307723 0.353889 0.604869 0.399495 1

26

Figure No. 3:

Figure No. 4:

y = -463.74x + 27834 R² = 0.0328

y = -463.74x + 27834 R² = 0.0498

12000

12200

12400

12600

12800

13000

13200

13400

32.4 32.5 32.6 32.7 32.8 32.9 33 33.1

Do

w J

on

es

Ind

ust

rial

Ave

rage

(US)

Clo

se $

BBXT Closing Price

BBXT Closing Price Line Fit Plot

Dow Jones Industrial Average(US) Close $

Predicted Dow Jones IndustrialAverage(US) Close $

Linear (Dow Jones Industrial Average(US)Close $)

Linear (Predicted Dow Jones IndustrialAverage(US) Close $)

y = 25.316x + 11999 R² = 0.0004

y = 25.316x + 11999 R² = 0.0006

12000

12200

12400

12600

12800

13000

13200

13400

25 25.2 25.4 25.6 25.8 26 26.2

Do

w J

on

es

Ind

ust

rial

Ave

rage

(US)

Clo

se $

TAYCP Closing Price

TAYCP Closing Price Line Fit Plot





27

Figure No. 5:

Figure No. 6:

Figure No. 7:

y = 262.98x + 6531.4 R² = 0.4993

y = 262.98x + 6531.4 R² = 0.7577

12000

12200

12400

12600

12800

13000

13200

13400

20.5 21 21.5 22 22.5 23 23.5 24 24.5

Do

w J

on

es

Ind

ust

rial

Ave

rage

(US)

Clo

se $

IDG Closing Price

IDG Closing Price Line Fit Plot





y = 825.73x - 5199.6 R² = 0.5218

y = 825.73x - 5199.6 R² = 0.7918

12000

12200

12400

12600

12800

13000

13200

13400

21 21.2 21.4 21.6 21.8 22 22.2

Do

w J

on

es

Ind

ust

rial

Ave

rage

(US)

Clo

se

$

BPOPN Closing Price

BPOPN Closing Price Line Fit Plot





y = 222.87x + 7103.1 R² = 0.091

y = 222.87x + 7103.1 R² = 0.1381

12000

12200

12400

12600

12800

13000

13200

13400

23 23.5 24 24.5 25 25.5

Do

w J

on

es

Ind

ust

rial

Ave

rage

(US)

Clo

se $

DCE Closing Price

DCE Closing Price Line Fit Plot





28

Exhibit No. 1:

Portfolio Asset Allocation Classification: July 5, 2012

Asset Class Average Returns

(%), As of July 05, 2012

Asset Class Standard

Deviation (%), As of July 5, 2012

Standard Deviation from

Asset Class AM - Upper Limit

Standard Deviation from

Asset Class AM - Lower Limit

Common Stocks: US Large Cap (Individual):

4.78% 7.13% 11.90% -2.35%

Common Stock: US Mid Cap (Individual):

4.14% 5.59% 9.74% -1.45%

Common Stock: US Small Cap (Individual):

4.35% 6.32% 10.68% -1.97%

Common Stocks (Individual): Foreign

6.73% 11.49% 18.22% -4.76%

U.S. and Foreign Exchange-Traded Funds (ETFs):

5.92% 0.98% 6.90% 4.94%

U.S. and Foreign Preferred Stocks: 2.85% 2.87% 5.73% -0.02%

U.S. and Foreign Mutual Funds: 2.40% 1.84% 4.24% 0.55%

U.S. and Foreign Government Bonds:

0.22% 1.81% 2.03% -1.59%

U.S. and Foreign Corporate Bonds: 0.56% 2.64% 3.20% -2.08%

U.S. and Foreign Real Estate: 7.99% 8.99% 16.99% -1.00%

U.S. and Foreign Commodities: 0.68% 7.39% 8.07% -6.72%

Portfolio Average Returns (%) - as of July 05, 2012:

3.69%

Standard Deviation Figure (In Green) is an AM of All Asset Classes:

5.19% 8.88% -1.50%

Graph 1:

29

Graph 2: DJIA versus S&P 500 Performance Overview: May 1 to June 25, 2012

30

Graph 3: DJIA versus NASDAQ Performance Overview: May 1 to June 25, 2012

31

Graph 4: Asset Class Standard Deviation

Graph 5: Asset Class Segmentation Performance Report

32

Exhibit No. 2:

Portfolio Asset Allocation

Classification: August 3, 2012

August 3: Asset Class Average Returns (%)

Asset Class Standard Deviation (%), As of

August 3, 2012

Asset Class Standard Deviation (%), As of

August 3, 2012 - Upper Limit

Asset Class Standard Deviation (%), As of August 3, 2012 - Lower Limit


5.90% 7.13% 13.02% -1.23%


4.52% 9.77% 14.29% -5.25%


-2.42% 9.64% 7.23% -12.06%


7.57% 9.88% 17.44% -2.31%

U.S. and Foreign Exchange-Traded Funds

(ETFs): 7.93% 1.62% 9.55% 6.31%

U.S. and Foreign Preferred Stocks:

4.13% 3.05% 7.18% 1.07%

U.S. and Foreign Mutual Funds:

4.26% 2.35% 6.60% 1.91%


-0.24% 1.15% 0.91% -1.39%

U.S. and Foreign Corporate Bonds:

0.51% 2.45% 2.96% -1.94%

U.S. and Foreign Real Estate:

6.73% 7.95% 14.68% -1.23%

U.S. and Foreign Commodities:

0.25% 6.57% 6.82% -6.32%

Portfolio Average Returns (%) - as of

August 3, 2012: 3.56%

Standard Deviation Figure (In Green) is an

AM for All Asset Classes:

5.60% 9.15% -2.04%

33

Graph 6

7.13%

9.77%

9.64%

9.88%

1.62%

3.05%

2.35%

1.15%

2.45%

7.95%

6.57%

5.60%





U.S. and Foreign Exchanged-Traded Funds (ETFs):







Standard Deviation Figure (In Green) is an AM for All…

Asset Class Standard Deviation (%), As of August 3, 2012





U.S. and Foreign Exchanged-Traded Funds (ETFs):







Standard Deviation Figure (In Green) is an AM for All Asset Classes:

34

Graph 7:

Graph 8:

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Asset Class Mean Returns Comparison: July 5 vs. August 3

July 5: Asset Class Average Returns (%) August 3: Asset Class Average Returns (%)

35

Appendix A: Assumptions, Methodologies, and Financial Models

Formulas: See Attachments

One-PageFormulaSheetForMid-Term.docx

One-PageFormulaSheetForFinal.docx

Investment Policy Statement

Documents

Transcript of Investment Policy Statement