Hi, this top part is the question, followed by all external info. At the very least please explain what this means & how to solve. I will upvote!
Exercise 7 - Risk Tolerance and Investment Returns Analyze the risk tolerance and asset allocation for the Youngs utilizing the Pass Scoring System. Investment Information The Investment Portfolio The $200,000 investment portfolio produces variable income from -10% to +15%, depending on the year. It was originally $400,000 but with poor investment returns and expenditures, it has been reduced to $200,000 at this time. Last year's income, which consisted mostly of dividends, was $8,000. Other Investment Assets The assets in the brokerage account are from gifts from Angel's father. These assets are invested in a money market account, but are currently earning 0%. Alan's 401(k) assets, which are from when he worked previously at a consulting firm, are invested in an equity index fund. Risk Tolerance Their portfolio consists of a few energy stocks that generated dividends and capital gains of approximately seven percent. They recognize that they need to modify their asset allocation, but are not sure what to do. They have answered the risk tolerance questionnaire below as follows: Strongly Disagree Global Portfolio Allocation Scoring System (PASS) for Individual Investors! Questions Strongly Agree Neutral Agree Disagree 1. Earning a high long-term total return that will allow my capi- tal to grow faster than the inflation rate is one of my Mr., Mrs. most important investment objectives. 2. I would like an investment that provides me with an Mr., Mrs. opportunity to defer taxation of capital gains to future years. 3. I do not require a high level of current income from my Mr., Mrs. investments. 4. I am willing to tolerate some sharp down swings in the return on my investments in order to seek a potentially Mr., Mrs. higher return than would nor- mally be expected from more stable investments. 5. I am willing to risk a short- term loss in return for a potentially higher long-run Mr., Mrs. rate of return. 6. I am financially able to accept a low level of liquidity in my Mr., Mrs. investment portfolio. 3% 2% PASS Score Cash and Money Market Fund Treasury Bonds/ Bond Funds Corporate Bonds/ Bond Funds International Bond Funds Index Fund Large Cap Funds/Stocks Mid/Small Funds/Stocks International Stock Funds Real Estate Funds RT1 Target RT2 Target RT3 Target RT4 Target 6-12 13 - 18 19 - 24 25 - 30 5% 5% 30% 20% 12% 0% 15% 10% 10% 4% 0% 5% 5% 4% 20% 20% 20% 25% 25% 20% 15% 10% 0% 5% 10% 20% 0% 5% 10% 15% 5% 10% 15% 100% 100% 100% 100% Expected Expected Standard Return Deviation 2.5% 2.0% 4.0% 4.0% 6.0% 5.0% 7.0% 6.0% 9.0% 14.0% 10.0% 16.0% 12.0% 18.0% 13.0% 8.0% 12.0% 22.0% 20% Fixed Income Equities Real Estate 50% 45% 5% 40% 50% 10% 30% 55% 15% 10% 70% 20% Expected Return Weighted Standard Deviation Expected Standard Deviation (est) 6.93% 9.45% 7.75% 7.73% 10.90% 8.94% 8.51% 12.34% 10.12% 9.77% 14.88% 12.20% Tax Information For the last few years they have been low income tax payers but are uncertain as to this year. Estate Information They have not prepared any estate planning documents. GOALS AND CONCERNS 1. They want to have a proper insurance, investment, and estates portfolio. 2. They want their taxes analyzed. 3. They want to know the cost of college education for the two children so that they can approach Angel's father about fully funding 529 Plans. The current cost of education is $35,000 per year in today's dollars and the inflation rate is expected to be 5%. They expect the children to be in school for 6 years each, and while they don't know, they expect the 529 Plan's investment rate of return to be 8.5%. 4. They want to plan for an early retirement (100% wage replacement ratio, excluding the trust income) at age 62, as they want to spend the autumn of their lives together traveling and visiting friends and family. Alan plans to save $18,000 per year in a 401(k) plan starting this year and to have an employer match of $6,000. They expect to live to age 90. 5. As neither of the Youngs currently have 40 quarters of Social Security earnings and because they are planning to retire at age 62, they do not want to include any Social Security retirement benefits in their planning. 6. They want to be debt free at retirement. Exercise 7 - Risk Tolerance and Investment Returns Analyze the risk tolerance and asset allocation for the Youngs utilizing the Pass Scoring System. Investment Information The Investment Portfolio The $200,000 investment portfolio produces variable income from -10% to +15%, depending on the year. It was originally $400,000 but with poor investment returns and expenditures, it has been reduced to $200,000 at this time. Last year's income, which consisted mostly of dividends, was $8,000. Other Investment Assets The assets in the brokerage account are from gifts from Angel's father. These assets are invested in a money market account, but are currently earning 0%. Alan's 401(k) assets, which are from when he worked previously at a consulting firm, are invested in an equity index fund. Risk Tolerance Their portfolio consists of a few energy stocks that generated dividends and capital gains of approximately seven percent. They recognize that they need to modify their asset allocation, but are not sure what to do. They have answered the risk tolerance questionnaire below as follows: Strongly Disagree Global Portfolio Allocation Scoring System (PASS) for Individual Investors! Questions Strongly Agree Neutral Agree Disagree 1. Earning a high long-term total return that will allow my capi- tal to grow faster than the inflation rate is one of my Mr., Mrs. most important investment objectives. 2. I would like an investment that provides me with an Mr., Mrs. opportunity to defer taxation of capital gains to future years. 3. I do not require a high level of current income from my Mr., Mrs. investments. 4. I am willing to tolerate some sharp down swings in the return on my investments in order to seek a potentially Mr., Mrs. higher return than would nor- mally be expected from more stable investments. 5. I am willing to risk a short- term loss in return for a potentially higher long-run Mr., Mrs. rate of return. 6. I am financially able to accept a low level of liquidity in my Mr., Mrs. investment portfolio. 3% 2% PASS Score Cash and Money Market Fund Treasury Bonds/ Bond Funds Corporate Bonds/ Bond Funds International Bond Funds Index Fund Large Cap Funds/Stocks Mid/Small Funds/Stocks International Stock Funds Real Estate Funds RT1 Target RT2 Target RT3 Target RT4 Target 6-12 13 - 18 19 - 24 25 - 30 5% 5% 30% 20% 12% 0% 15% 10% 10% 4% 0% 5% 5% 4% 20% 20% 20% 25% 25% 20% 15% 10% 0% 5% 10% 20% 0% 5% 10% 15% 5% 10% 15% 100% 100% 100% 100% Expected Expected Standard Return Deviation 2.5% 2.0% 4.0% 4.0% 6.0% 5.0% 7.0% 6.0% 9.0% 14.0% 10.0% 16.0% 12.0% 18.0% 13.0% 8.0% 12.0% 22.0% 20% Fixed Income Equities Real Estate 50% 45% 5% 40% 50% 10% 30% 55% 15% 10% 70% 20% Expected Return Weighted Standard Deviation Expected Standard Deviation (est) 6.93% 9.45% 7.75% 7.73% 10.90% 8.94% 8.51% 12.34% 10.12% 9.77% 14.88% 12.20% Tax Information For the last few years they have been low income tax payers but are uncertain as to this year. Estate Information They have not prepared any estate planning documents. GOALS AND CONCERNS 1. They want to have a proper insurance, investment, and estates portfolio. 2. They want their taxes analyzed. 3. They want to know the cost of college education for the two children so that they can approach Angel's father about fully funding 529 Plans. The current cost of education is $35,000 per year in today's dollars and the inflation rate is expected to be 5%. They expect the children to be in school for 6 years each, and while they don't know, they expect the 529 Plan's investment rate of return to be 8.5%. 4. They want to plan for an early retirement (100% wage replacement ratio, excluding the trust income) at age 62, as they want to spend the autumn of their lives together traveling and visiting friends and family. Alan plans to save $18,000 per year in a 401(k) plan starting this year and to have an employer match of $6,000. They expect to live to age 90. 5. As neither of the Youngs currently have 40 quarters of Social Security earnings and because they are planning to retire at age 62, they do not want to include any Social Security retirement benefits in their planning. 6. They want to be debt free at retirement
