ACTIVITY: RE-BALANCING A CLIENT PORTFOLIO

Twelve months ago you established an investment portfolio for your clients James and Sarah.At the review next week, you are going to raise the issue again about the importance of maintaining their asset allocation so it is consistent with their risk profile and the investment strategy they both agreed on when the portfolio was first set up.

The original investment portfolio in the amount of$600,000 was split 70% in a Cash Managed Fund and 30% in an Equity Managed Fund, in line with their target asset allocation.

The Equity Managed Fund contained some speculative shares that were of particular interest to James.

Today you are reviewing Jame's and Sarah's investments, and the performance of both funds.

The cash fund has returned 1.7% and the equity fund has returned anegative six percent(-6%) in the previous 12 months.

You want to re-balance Jame's and Sarah's portfolio back to their target asset allocation of 12 months agoin line with Strategic Asset Allocation principles.

What is the value of their portfolio taking into account the investment returns for the 12 month period?Show the amount in the Cash Managed Fund and the Equity Managed fund.

Original Investment Current Value of Investment after 12 months

Cash Managed Fund $ ? $ ?

Equity Managed Fund $ ? $ ?

Total $ ? $ ?

Assuming James and Sarah are comfortable re-balancing their portfolio and wish to proceed.

Question 1: How much should be in the Cash Managed Fund?

$ Answer

Question 2: How much should be in the Equity Managed Fund?

$ Answer

Question 3:Which investment will be purchased and how much?

Question 4:Which investment will be sold and how much?