Explain to Ken and Loretta why they should consider re-balancing their portfolio.

Assessment Activity 3 Calculation questions Asset Allocation

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Background

 Twelve months ago you established an investment portfolio for your clients Ken and Loretta.  At the review next week, you are going to raise the issue again about the importance of maintaining their asset allocation so it is consistent with their risk profile and the investment strategy they both agreed on when the portfolio was first set up.

The original investment portfolio had $550,000 in a Cash Managed Fund and Equity Managed Fund, split 70% across the Cash Managed Fund and 30% across the Equity Managed Fund, in line with their target asset allocation. The Equity Managed fund contained some speculative shares that were of particular interest to Ken.  Today, you are reviewing Ken and Loretta’s investment and the performance of both funds. The cash fund has returned 4.6% and the equity fund has returned a negative 4% in the previous 12 months. You want to re-balance Ken and Loretta`s portfolio back to their target asset allocation of 12 months ago in line with Strategic Asset Allocation principles.

 

Required

  1. Explain to Ken and Loretta why they should consider re-balancing their portfolio.
  2.  What is the value of their portfolio now?  Show the amount in the Cash Managed Fund and the Equity Managed fund.

 

Assuming Ken and Loretta are comfortable re-balancing their portfolio and wish to proceed.

  1.  How much should be in the Cash Managed Fund?
  2. How much should be in the Equity Managed Fund?
  3. Which investment will be purchased and how much?
  4. Which investment will be sold and how much?

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