Sch. PE #1 - Q1 D

volume 1, morning session, exam 1, question 1, part d. answer on page 192 Portfolio D is recommended…really? who disagrees/agrees? I completely disagree. The only argument schweser makes is that the upside is not a goal for this portfolio but to maintain the inflation adjusted return requirement of 5.1% and that’s it… here’s my logic: All portfolios meet the return requirement so none can easily be eliminated. A - no good as cash balance (0%) is too low B - no good as for a below average risk tolerance, this portfolio has 60% allocated to equity which is likely to high. D - no good as cash balance (35%) is too high for a portfolio that has a liquidity need of only 3.08%; with a high cash allocation and 35% allocated to bonds and only 10% to equity, maintaining pace with inflation becomes much more unlikely, and thus is not appropriate for the long term nature of the portfolio. C- meets return requirement, has a nominal exposure to equities (30%), provides diversification through the use of an alternative asset (REIT) and exposrue to international stocks; has a moderate cash balance (10% or $500,000) that will be more than able to meet spending needs; schweser didnt’ adress any of this; they use Roy’s safety first to determine the probability of having a greater than 2% loss in the portfolio by LOOKING IT UP IN THE Z table. and we know from past exams we are not given or expected to know the z table…

I agree, I also picked C I couldn’t rationalize it, I just went on to mark other questions… On the most basic level, I did this question and crossed out D because it had 35% cash. and 10% Tbills Now, that’s liquidity…