5.8 percent exceeds the required return of 5.4 percent, and the required return would actually
decline if the surviving spouse lives longer than five years. The time horizon for the portfolio is
relatively short, ranging from a minimum of five years to a maximum of 10 years. The
Mueller’s sole objective for these funds is to provide adequate funds for the building addition.
Growth requirements for the portfolio are modest and the Mueller’s willingness to take on risk
is low. The portfolio would be unlikely to achieve its objective if large, even short term, losses
were absorbed during the minimum five year time horizon. Except for taxes, no principal or
income disbursements are expected for at least five years; therefore, only a minimal or even
zero cash reserve is required. Accordingly, an allocation of 40 percent to equities to provide
some growth and 60 percent to intermediate fixed income to provide stability and capital
preservation is appropriate.
There is no second best portfolio. Portfolio A’s cash level is higher than necessary and the
portfolio’s expected return is insufficient to achieve the $2,600,000 value within the minimum
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