Jill Jones inheirited a large lump sum of money. This lump sum will represent the total of her investable assets and will need to be invested in a way that will support her spending needs in retirement. Jill has brought the personal finance documents you requested to the meeting, completed a risk questionnaire and spoke with you about her retirement objetives.In preparation for the next meeting you use the information you have gathered to assess Jillâs goals in light of her risk tolerance, risk perception, risk capacity, and other personal and financial circumstances. Balanceing all of these factors, you have decied that a diversified portfolio with moderate risk is the reasonable approach to sustaining Jillâs spedning needs in retirement. You know that you will need to engage in extensive explanations and education to ensure that Jill will remain comfortable with the recommended portfolio over the long run.Construct an optimal client portfolio by the allocation of wealth amongst risky assets and risk-free securitiies. Diversify the portfolio among a dozen asset classes instead of thousands of individual securities.Refer to Table 1.0 to see nine Assets Classes, Annual Returns, Standard Deviations and Sharpe RatiosSelect four Asset Classes to include in the clientâs portfolio.Determine the what percentage the Asset Class will represent in the clientâs portfolio.Construct a weighted average for the investorâs portfolio consisting of the four Classes of Assets, their weights in the portfolio , and annual returns earned.Calculatee the expected weighted average return on the investorâs portfolio (see Table 2.0 for an example), the Standard Deviations, and Sharpe Ratios.Is the investorâs portfolio less risky than the benchmark(s)?Is the asset allocation strategy consistent with the clientâs risk tolerance?What would you say to Jill Jones to recommend the investorâs portfolo?Table 1.0 Examples of Annual Returns, Std Deviations, and Sharpe Ratios.364px;=”” collapse;=”” 12px=””>Returns & Risk 1977 to 2011Annual ReturnsStandard Deviation (Risk)*Sharpe Ratio*Tbills2.8%2.1%1.03Bonds5.8%2.9%0.14US Lg5.7%20.4%0.17US Sm6.2%20.6%0.28REITS9.2%22.7%0.02Intl Lg3.4%23.1%0.11Intl Sm6.0%28.1%0.11EM7.1%38.5%0.24Portfolio6.6%15.5%0.24*Higher standard deviation indicates higher volatiity of returns.** The Sharpe Ratio measures return and risk efficiency. A higher number indicates better risk adjusted performance.Table 2.0 Weighted Average Returns in Example Portfolo.364px;=”” collapse;=”” 12px=””>Selected Asset ClassesWeight inPortfolioReturnUS Lg40%1.12%Bonds30%1.74%Intl Sm20%1.20EM10%.71%Portfolio100%4.77%
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