Ten years have passed, and The Smiths will retire this year when they receive the inheritance of $$2$ million after tax. Other information about their financial situation is summarized below:

a$)$ pension income will total $$100,000$ a year and will not increase with inflation

b$)$ annual expenses will total $180,000$ initially and will increase with inflation

c$)$ inflation is expected to be $2\%$ annually

d$)$their personal investments now total $1,100,000$ excluding trust distribution The Smiths will rely on this personal portfolio to support their lifestyle and do not wish to reduce their level of spending

e$)$ The Smiths have health problems, and neither is expected to live more than $10$ years

f$)$ all healthcare expenses will be covered by employer paid insurance

The Smiths sole investment objective is to meet their spending needs The Smiths are not concerned with growing or maintaining principle and any income deficit may be met with both investment income and by reducing the principle.

The Trust distribution of $$2$ million after tax

The Smiths will maintain separate accounts for their personal assets and the trust distribution. They do not plan to withdraw income or principle from the trust portfolio, but they have made a minimum pledge of $$2\mathrm{.}5$ million to a charitable organization for the next five years. They will need at least a $5\mathrm{.}4\%$ after tax return on the trust portfolio to meet their pledge. All tax liabilities produced by the trust assets will be paid from the trust portfolio. The Smits have been presented with the following alternative portfolios:

Asset Allocation A $\%$ B $\%$ C $\%$ D $\%$

US large cap stocks $14304030$

US small cap stocks $351025$

International Stocks $351025$

Medium term fixed income $70603020$

Money Market $100100$

Expected nominal after tax return $4\mathrm{.}25\mathrm{.}87\mathrm{.}58\mathrm{.}5$

Annual Standard Deviation $6\mathrm{.}08\mathrm{.}013\mathrm{.}018\mathrm{.}0$

$1)$ Select and justify with al least two reasons the most appropriate option for their personal assets$$ portfolio $($The $$1\mathrm{.}1$ million$)$

$2)$ Select and justify with at least two reasons the most appropriate option for their trust portfolio. $($The $$2$ million$)$