1. Juan Pablo Alonso, age 40, is the manager of a national, publicly-funded soccer team located in a country that uses the U.S. dollar (USD) as its currency. This countrys debt is rated AAA. Alonso has a one-year employment contract that has been renewed for several years. He is confident that he can maintain this job, or a similar managing position, until his planned retirement at age 55. Alonso is divorced and the father of teenage children. He wants to fund a dedicated trust to provide for his childrens needs until they reach age 25. He will need USD 250,000 within the next few months to fund the trust.

Alonsos income tax rate is 30%. Other than a small cash reserve, he holds all of his investment assets in a tax-exempt account with a current value of USD 900,000. Contributions to this account are made after tax. Withdrawals are entirely tax-free, without penalty. Alonso saves USD 25,000 of his after-tax income every year, and plans to continue doing so until retirement. His next contribution will be made in one year. As part of his normal expenses, Alonso annually provides approximately USD 30,000 of support to local youth sporting leagues.

When Alonso retires in 15 years, he plans to purchase a 25-year annuity that pays USD 100,000 after tax annually. He will need USD 1,600,000 at retirement to fund the annuity. Alonso expects the annual payout to be sufficient to meet all his needs on an inflation-adjusted basis. He does not plan to leave any estate at his death.

A. Calculate the required annual return that would enable Alonso to purchase the retirement annuity at age 55. Show your calculations. Note: Assume all cash flows occur at the end of each period.

B. Discuss two reasons why Alonsos ability to take risk could be considered above average.

Five years have passed, and Alonso, age 45, signs a 10-year employment contract, which includes a one-time signing bonus, with a corporate-owned professional soccer club. His annual base salary with this club is higher than his previous salary and is indexed to inflation. Because the club has had financial difficulties in the past, the owner agrees to guarantee Alonsos salary over the life of the contract. Alonso intends to keep his living expenses unchanged and increase his annual savings. Alonso still plans to retire at the end of the 10-year contract. Given his improved financial position, he now plans to depend on cash flow from his investment portfolio to meet retirement expenses rather than purchase the 25-year annuity.

C. i. Describe one change in Alonsos circumstances that has decreased his earnings risk and one change that has increased his earnings risk.

ii. Describe one change in Alonsos circumstances that has decreased his financial market risk in retirement and one change that has increased his financial market risk in retirement.

Alonso has a buy-and-hold portfolio of individual securities, including treasury bills, asset-backed securities (ABS), government bonds, and equities. His current portfolio allocation is shown in Exhibit 1.

Exhibit 1

Alonsos Current Portfolio Allocation Asset Class	Portfolio Weight
Treasury bills	5%
A-rated corporate amortizing ABS	10%
AAA-rated government bonds	10%
Small-cap domestic equities	25%
Large-cap international equities	50%

D. Determine which one asset class in Alonsos portfolio most closely resembles his current human capital. Justify your response with two reasons.