Asset Allocation - subportfolio risk

Lennon is the client, Everett (18) and Marshall (14) are the children.

  • Everett is just beginning university and plans to pursue a medical degree. Lennon plans on paying for his entire education and living expenses as well as providing some assistance in funding his future practice. She believes that these goals will be covered with $1.5 million in present value terms.
  • She has begun the process of setting up a special needs trust to provide lifetime benefits for Marshall that will not interfere with the government benefits that he is eligible to receive. It will be funded with $2 million within the year.
  • She recently received an honorary doctorate from her alma mater and has started the process of endowing a chair in its communications department. She anticipates that the funding will be made available to the university in two years; it has a present value of $1.75 million

Which of the sub-portfolios dedicated to Lennon’s aspirational goals is in the best position to tolerate the greatest risk exposure? The one dedicated to:

A. Everett’s education

B. Marshall’s trust

C. University endowment

A is correct. Both of the funds planned for the trust and university endowment represent an imminent need (immediate for the trust and within two years for the endowment). The funding needed for education, however, extends over the longest time horizon, possibly as long as 8 to 10 years. Thus, its sub-portfolio would be in the best position to take on the greatest risk.

I would have went for B - because of the longest horizon. However, it requires immediate funding (this year). Therefore needs to be liquid.

However, for endowments, aren´t they supposed to have a very long horizon? Funding begins in two years, yes, but the horizon extends beyond the 8-10 years of university time horizon?

Thank you!!

B would definitely be an incorrect choice, whichever way you look at . I would have gone with C, but maybe A has a better merit because of the long time horizon.

C. The time period of 2 yrs. already mentioned by which the FV of $1.75Mn should be made available.

Hi Herb,

Upon doing the recap, I came across this question again. Which is somehow still not clear.

Yes, the educational goal has a longer time horizon, due to the fact that it takes more years to complete a medical degree, versus the other two goals from this example. However “Everett is just beginning university”, wouldn´t that mean an imminent need, for which you need liquidity right away?? Hence, risk tolerance not that high…

In my opinion, this question was poorly formulated regarding the first goal. What do you think?

Thank you!


“A” seems the right answer to me, even if Everett is just beginning university, education costs are per year or semester, not a ‘one-time’ expense I think.

Hence the longer investment horizon, at a higher risk exposure.