Jill Frenkel, 62, works for the Smithton Company as the firm’s controller. Frenkel is covered by a generous retirement package upon her retirement which is not indexed for inflation, she is in excellent health, and is also covered by the company health plan in retirement. Frenkel’s current asset allocation is 70% large cap stocks, 25% intermediate-term, high quality bonds and 5% cash for emergency needs. Given Frenkel’s circumstances, she should: A) Not rebalance her portfolio at this time. B) Sell stock index futures and buy bond index futures to synthetically create a 20% stock / 80% bond allocation and save on transaction costs. C) Reduce her allocation to stocks significantly and buy low quality bonds for her portfolio with the proceeds because Jill faces the need for inflation protection in this stage of her lifecycle.

B. Her equity-like human capital (I say that loosely, I mean it to say she is in good health, not a lot of obligations, etc.) should be substituted with bond-like financial capital, so she should move more assets into fixed-income. Choice B.


A? C will increase the risk so out of scope. B - Index future will have frequent rebalancing and increase her trasaction cost because of this.


Here is Schweser’s answer: A was correct! Given the fact that Jill is in good health, is covered by the health plan and also has a healthy retirement portfolio, she should leave her allocation intact because since the retirement plan is not inflation indexed, she may need the growth potential of equities in the future.

wowo viva…king of the castle