You are a financial advisor to Mr$.$and Mrs$.$ Smith. They are $65$ years old, retired with $$3$ million in their pension plan portfolio. They have no other investments and receive no other income.

They state that their average tax bracket is $25\%,$ they need to cash out $$75,000$ per year from their pension portfolio for their living expenses, and another $ $45,000$ per year for the college fund for their grandchildren. Both are in today$$s dollar $($indexed or adjusted for inflation in the coming years$).$ You forecast that the long$-$term inflation is $2\mathrm{.}5\%.$

Their current pension plan portfolio allocation is $75\%$ in large$-$cap, well$-$established U$.$S$.$ stocks and $25\%$ in U$.$S$.$ Treasury notes.

A$.$ Calculate their annual return objective before and after tax, in percentage.

B$.$ What is their ability and willingness to risk $($risk tolerance level$)?$

C$.$ Ability to take risk is

a$.$ Average

b$.$ Below average

c$.$ Above average

D$.$ Willingness to take risk is;

a$.$ Average

b$.$ Below average

c$.$ Above average

E$.$ Choose one of the combined $($joint$)$ answer $($a$,$ b$,$ or c$)$ based on your answer in part B$.$

Willingness Ability

a$.$ Above average average

b$.$ Below average average

c$.$ Above average above average

F$.$ Based on the information in the case, and your answers in the above parts $($A$,$ B$,$ and C$)$ which one of the following portfolios should you recommend?

Expected Asset Allocation

Return Portfolio A Portfolio B Portfolio C

U$.$S$.$ large stocks $9\%20\%5\%10\%$

U$.$S$.$ small stocks $10201510$

Foreign stocks $12151510$

Corp. bonds $515035$

Gov. bonds $310025$

Venture capital $115300$

Real estate $1510300$

Cash $15510$

Pretax return $8\mathrm{.}8\%11\mathrm{.}6\%5\mathrm{.}7\%$

After$-$tax return $5\mathrm{.}6\%7\mathrm{.}4\%3\mathrm{.}6\%$

after$-$tax yield $1\mathrm{.}9\%1\mathrm{.}9\%2\mathrm{.}8\%$

a$.$ Portfolio A

b$.$ Portfolio B

c$.$ Portfolio C