Expected Annual Return Assignment

Let’s suppose that your friend Marty has just inherited $1,000,000 in cash. He knows that you have completed a class in Portfolio Analysis and wants you to help him invest the money. Marty is 30 years old, married, with two children ages 2 and 4. Marty is a computer engineer and is progressing in his career; his wife is a stay-at-home mom. Marty’s employer provides group life, health, and disability insurance, but does not offer a 401K or other type of retirement plan. Apart from a $200,000 down payment on a house, Marty will use the remaining $800,000 of his recent windfall to fund both the educational expenses for his children and his retirement needs. He does not plan to withdraw any of the money until his older child starts college, 14 years from now, and he does not plan to retire until age 60. He says that he is willing to accept a moderate amount of risk. He is focused on capital appreciation, but he hopes that diversification will achieve portfolio stability as well as growth.

Asset Class Projected Return Expected Standard Deviation Proposed Allocation
Large-cap 9% 15%
Mid-cap 10% 17%
Small-cap 12% 19%
International 13% 21%
Emerging markets 18% 30%
Bonds 5% 9%
Cash equivalents 2% 0%

Given the projected annual returns and proposed allocation, what is the expected annual return on the recommended portfolio? With the information given, is it possible to determine the expected standard deviation of the portfolio? Why or why not? Ignoring taxes and inflation, and assuming the expected annual return remains constant, what is the expected value of the portfolio in 14 years, when Marty’s first child begins college? Get Finance homework help today

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