A retiree, James Timor, has an asset base of ‚¬1,900,000. Taking into account annual inflation of 3 percent, taxes of 15 percent, management fees of 50 basis points, his objectives, his constraints, and his annual spending needs of ‚¬90,000, his financial advisor recommended an asset allocation with an expected return of 9.82 percent and a standard deviation of 8 percent. The advisor based this on the following calculations:

During the next year, Timor's return is negative 6.18 percent. He has a scheduled meeting with his advisor. If his portfolio's returns are normally distributed and independent, what is the probability of a loss of 6.18 percent or more in one year? What is the probability of three years in a row of returns of less than 9.82 percent?

Transcribed Image Text:

Principal Return rate Management expenses Inflation Tax rate Annual spending 0.0982 0.005 0.03 0.15 1,900,000 186,580 9,500 -57,000 -27,987 92,093