The most appropriate asset allocation for the Martins’ new charitable gift sub-portfolio is:

A. 40% equities/60% bonds.

B. 70% equities/30% bonds.

C. 100% equities/0% bonds.

lsbeth Quinn and Dean McCall are partners at Camel Asset Management (CAM). Quinn advises high-net-worth individuals, and McCall specializes in retirement plans for institutions.
Quinn meets with Neal and Karina Martin, both age 44. The Martins plan to retire at age 62. Twenty percent of the Martins’ $600,000 in financial assets is held in cash and earmarked for funding their daughter Lara’s university studies, which begin in one year. Lara’s education and their own retirement are the Martins’ highest-priority goals. Last week, the Martins learned that Lara was awarded a four-year full scholarship for university. Quinn reviews how the scholarship might affect the Martins’ asset allocation strategy.
The Martins have assets in both taxable and tax-deferred accounts. For baseline retirement needs, Quinn recommends that the Martins maintain their current overall 60%
equity/40% bonds ( 8% rebalancing range) strategic asset allocation. Quinn calculates that given current financial assets and expected future earnings, the Martins could reduce future retirement savings by 15% and still comfortably retire at 62. The Martins wish to allocate that 15% to a sub-portfolio with the goal of making a charitable gift to their alma mater from their estate. Although the gift is a low-priority goal, the Martins want the sub-portfolio to earn the highest return possible. Quinn promises to recommend an asset allocation strategy for the Martins’ aspirational goal.
Next, Quinn discusses taxation of investments with the Martins. Their interest income is taxed at 35%, and capital gains and dividends are taxed at 20%. The Martins want to minimize taxes. Based on personal research, Neal makes the following two statements:
Statement 1. The after-tax return volatility of assets held in taxable accounts will be less than the pre-tax return volatility.
Statement 2. Assets that receive more favorable tax treatment should be held in tax-deferred accounts.
The equity portion of the Martins’ portfolios produced an annualized return of 20% for the past three years. As a result, the Martins’ equity allocation in both their taxable and taxdeferred portfolios has increased to 71%, with bonds falling to 29%. The Martins want to keep the strategic asset allocation risk levels the same in both types of retirement portfolios.
Quinn discusses rebalancing; however, Neal is somewhat reluctant to take money out of stocks, expressing confidence that strong investment returns will continue.
Quinn’s CAM associate, McCall, meets with Bruno Snead, the director of the Katt Company Pension Fund (KCPF). The strategic asset allocation for the fund is 65% stocks/
35% bonds. Because of favorable returns during the past eight recession-free years, the KCPF is now overfunded. However, there are early signs of the economy weakening. Since Katt Company is in a cyclical industry, the Pension Committee is concerned about future market and economic risk and fears that the high-priority goal of maintaining a fully funded status may be adversely affected. McCall suggests to Snead that the KCPF might benefit from an updated IPS. Following a thorough review, McCall recommends a new IPS and strategic asset allocation.
The proposed IPS revisions include a plan for short-term deviations from strategic asset allocation targets. The goal is to benefit from equity market trends by automatically increasing (decreasing) the allocation to equities by 5% whenever the S&P 500 Index 50-day moving average crosses above (below) the 200-day moving average.