Jill Jones inheirited a large lump sum of money. This lump sum will represent the total of her investable assets and will need to be invested in a way that will support her spending needs in retirement. Jill has brought the personal finance documents you requested to the meeting, completed a risk questionnaire and spoke with you about her retirement objetives.

In preparation for the next meeting you use the information you have gathered to assess Jills goals in light of her risk tolerance, risk perception, risk capacity, and other personal and financial circumstances. Balanceing all of these factors, you have decied that a diversified portfolio with moderate risk is the reasonable approach to sustaining Jills spedning needs in retirement. You know that you will need to engage in extensive explanations and education to ensure that Jill will remain comfortable with the recommended portfolio over the long run.

1. Construct an optimal client portfolio by the allocation of wealth amongst risky assets and risk-free securitiies. Diversify the portfolio among a dozen asset classes instead of thousands of individual securities.

A. Refer to Table 1.0 to see nine Assets Classes, Annual Returns, Standard Deviations and Sharpe Ratios

B. Select four Asset Classes to include in the clients portfolio.

C. Determine the what percentage the Asset Class will represent in the clients portfolio.

D. Construct a weighted average for the investors portfolio consisting of the four Classes of Assets, their weights in the portfolio , and annual returns earned.

E. Calculatee the expected weighted average return on the investors portfolio (see Table 2.0 for an example). Include the Standard Deviations and Sharpe Ratios.

2. Is the investors portfolio less risky than the benchmark(s)? (Please see Table 3.0 for the names of the Benchmarks for the asset classes.)

3. Is the asset allocation strategy consistent with the clients risk tolerance?

4. What would you say to Jill Jones to recommend the investors portfolo?

Table 1.0 Examples of Annual Returns, Std Deviations, and Sharpe Ratios

Returns & Risk 1977-2011	Ann Returns	Standard Deviation (Risk)*	Sharpe Ratio**
Tbills	2.8%	2.1%	-
Bonds	5.8%	2.9%	1.03
US Lg	5.7%	20.4%	0.14
US Sm	6.2%	20.6%	0.17
REITs	9.2%	22.7%	0.28
Intl Lg	3.4%	23.1%	0.02
Intl Sm	6.0%	28.1%	0.11
EM	7.1%	38.5%	0.11
Portfolio	6.6%	15.5%	0.24
*Higher standard deviation indicates higher volatility of returns. ** The Sharpe Ratio measure return and risk efficiency. A higher number indicates better risk adjusted performance.

Table 2.0 Weighted Average Returns in Example Portfolo

Selected Asset Classes	Weight inPortfolio	Return
US Lg	40%	1.12%
Bonds	30%	1.74%
Intl Sm	20%	1.20
EM	10%	.71%
Portfolio	100%	4.77%

Table 3.0 Benchmarks for Asset Classes

Asset Class Index Tbills One-Month US Treasury Bills Bonds Barclays Capital US Government/Credit Bond Index Intermediate USLg Russell 1000 Index US Sm Russell 2000 Index REITs Dow Jones USSelect REIT Index Intl Lg MSCI EAFE Index Intism Dimensional International Small Cap Index EM MSCI Emerging Markets Index