Both a wife and her husband work in the airline industry. They are in their 40s,
ID: 2715680 • Letter: B
Question
Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation?
A.
10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks
B.
0% money market; 60% long-term bonds; 40% stocks
C.
10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks
D.
5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects
Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation?
A.
10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks
B.
0% money market; 60% long-term bonds; 40% stocks
C.
10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks
D.
5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects
Explanation / Answer
Since liquidity is not a concern, investing in money market can be low and no investment is needed in high dividend paying stocks.
Option A and C are ruled out, since they involve significant investment in high dividend yielding stocks.
Now we are left with Option B and D
Long term bonds generally pay less than the required rate this couple is considering, so a significant amount has to be invested in high yield return securities
So Option D is correct, which has fulfilled all the required objectives.
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