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Robert and April Johnson have come to you with a portfolio of investments that seem to be a mixture of past adviser’s uncoordinated recommendations. One positive is that some of the funds seem to be doing well, another is that all the funds are tax-deferred accounts held for specific purposes, and a third is that the Johnsons seem to be able to meet their goals. So your job is not so much financial planning as investment planning. Table 1.0 contains data on what the clients have brought to you.
Robert and April have only two goals: the college education of their twins in six years and their retirement in 20 years. Ignore the amounts necessary to achieve their objectives. Assume that the allocation of their current funds is equal in each account. Also, assume the amount in the Education Savings Account is enough to fund their education goal. Assume that their current savings rate plus their 401(k) is just sufficient to meet their retirement goal with a high level of confidence. Your assignment is as follows:
Evaluate the current investments of Robert and April. Make recommendations as to the viability and appropriateness of their current investments (for example, risk level, time horizon, and investment objectives.)
Is the overall portfolio sufficiently diversified?
Determine if the current investments should be kept. Should one or more investments be sold? If so which ones?
Decide which funds should be in the Retirement Portfolio and which should be in the Education Savings Account portfolio and construct two target portfolios that match their specific goals and have the best return prospects.
Robert and April are not well educated about investing. Provide support for your recommendations. Write your recommendations in a way that educates and explains portfolio risk and return to the Johnsons.
| Fund | Class | Portfolio | Current
Allocation |
Beta
(to S &P) |
Sharpe Ratio | Treynor Ratio | Jensen’s Alpha |
| 1 | Domestic growth | 401(k) | 16.7% | 1.1 | 0.773 | 15.455 | 1.5% |
| 2 | Global growth | 401(k) | 16.7% | 0.8 | 0.625 | 18.75 | 0.3% |
| 3 | Balanced | 401(k) | 16.7% | 0.6 | 0.667 | 16.667 | -0.4% |
| 4 | U.S. bonds, mixed grade | Education Savings Account | 16.7% | 3.6 years’ duration | NMF | NMF | +1% (to bonds index |
| 5 | S & P 500 index | Education Savings Account | 16.7% | 1.0 | 0.770 | 17.0 | -.10% |
| 6 | Equity income | Education Savings Account | 16.7% | 0.8 | 1.06 | 21.25 | 3.0% |
*MNF – No Meaningful Figure.
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