Scenario 1 Individual Portfolio

Emma Young, a 47-year-old single mother of two daughters, ages 7 and 10, recently sold a business for $5.5 million net of taxes and put the proceeds into a money market account. Her other assets include a tax-deferred retirement account worth $3.0 million, a $500,000 after-tax account designated for her daughters education, a $400,000 after-tax account for unexpected needs, and her home, which she owns outright.

Her living expenses are fully covered by her job. Young wants to retire in 15 years and to fund her retirement from existing assets. An orphan at eight who experienced childhood financial hardships, she places a high priority on retirement security and wants to avoid losing money in any of her three accounts.

Young wants to earn at least 6.0% after tax per year, without taking on additional incremental risk. Youngs capital gains and overall tax rate is 25%.

Young has requested you (her broker) to propose a portfolio for the proceeds in the money market as well as a rebalancing policy.

As Youngs broker, you propose three portfolios to Young (as seen in Table 1) for the $5.5 million proceeds in the money market account. There is a $500,000 minimum investment requirement for alternative assets (such as private equity).

Table 1

Proposed Portfolios, Returns and Standard Deviations

Asset Class	Expected Pre-Tax Returns	Portfolio 1 Allocation	Portfolio 2 Allocation	Portfolio 3 Allocation
Municipal Bonds	3%	5%	35%	30%
Small-Cap Equities	12%	50%	10%	35%
Large-Cap Equities	10%	35%	50%	35%
Private Equity	25%	10%	5%	0%
Total		100%	100%	100%
Standard Deviation		28.2%	16.3%	15.5%

1- Calculate the expected return of each proposed portfolio on an after-tax basis in Scenario 1.

2-Determine which proposed portfolio most closely meets Young's desired objectives .