Brendan Jones, CFP, is a financial planning and investment manager in the Washington, D.C. area.Jones has two new clients, Jeffrey and Mary Lewinsky, a married couple who live relatively close to the office where Jones works.Jeffrey is 47 years old and Mary is 45 years old.They have two children, Jessica, 14 years old, and Jonathan, 11 years old.Jeffrey and Mary have stable jobs at a local university, and plan to work until mandatory retirement age, 70 years old, when they will be eligible for the university pension.They will also collect Social Security benefits at that time.The couple are good savers and are careful and frugal with all of their discretionary purchases.

Jeffrey and Mary have a goal of achieving the best possible return on their investments given their risk tolerance.They purchased the ABC mutual fund five years ago.The following annual returns were realized over that time frame:

YearAmount

1

+3.5%

2

-20.5

3

+10%

4

+27.5%

5

+1.5%

The couple also purchased two other funds at the same time as the ABC fund.Other portfolio statistics for both of the other funds appear here:

Fund MNB

Fund XYZ

Total Return

18%

11%

Standard Deviation

23%

16%

% of Portfolio

35%

65%

Correlation coefficient of A&B = .25

In addition to the investments above, each with market values of approximately $200,000 each, Jeffrey and Mary have just received an inheritance from Mary's aunt.The inheritance, at the time of receipt, consisted of $1M of Genteck, Inc. common stock and $5M of cash.Genteck has a beta of 1.1.The broad equity market is expected to return 10% this year.Although this inheritance is sizeable, Mary's aunt lost a considerable amount of wealth during the dotcom bubble, and Jeffrey and Mary do not want to repeat that mistake.They are interested in Brendan's recommendations for these investments.

Brendan's final recommendation includes, amongst other recommendations, the purchase of one of the two mutual funds to achieve the capital appreciation objective for that portion of the portfolio:

Fund 1

Fund 2

Fund Objective

Large Cap Growth

Small Cap Growth

5 year total return

14.9%

16.3%

Beta

1.05

1.21

Risk Free Rate

4.0%

4.0%

What was the compound annual return for the ABC fund held by the couple?

a.3.20%

b.5.00%

c.8.50%

d.12.10%

The Lewinskys would like to hold all shares of Genteck, Inc. stock for the time being, and Jones feels that the stock will not move in price much at all or will trend lower. If Jones advises that they get extra income from the stock while still holding all the shares, which option position should the couple take?

a.Buy Genteck, Inc. puts

b.Buy Genteck, Inc. calls

c.Sell Genteck, Inc. puts

d.Sell Genteck, Inc. calls

What is the coefficient of determination (R²) of Fund MNB & XYZ?

a.6.25%

b.21.49%

c.50.00%

d.86.54%

Click link for case details:Case Study: The Lewinskys.

What is the portfolio standard deviation of the portfolio consisting of the two funds, fund MNB and fund XYZ?

a.13.16%

b.14.66%

c.18.45%

d.19.50%