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Wealth Management Case Scenario

You may assume that the individual is income neutral. That is, any allocations to investment, living expenses, loan re-payments and taxes will be covered by income earned so that the investment decision can be focused upon.
You are advising a family unit of two adult partners and one child (no other children are planned). The family plans to buy a house now and plans to retire at 70 with wealth of $4,000,000.
Since it is extremely difficult to mark a house continuously to market, you have decided to use an ETF to approximate the gain in house value. The ETF chosen is iShares Residential Real Estate Capd ETF (Symbol: REZ). While this does contain some storage, it is predominately residential (or residential medical).
The remain wealth will be invested across a variety of assets. If you are doing traditional wealth management, this allocation is only across equities and fixed income. If you are doing modern wealth management, this allocation is across equities, fixed income and alternative investments.

Funds to be Used

To limit the scope of your analysis, the following funds will be used:Equities – Your assigned mutual fund

Fixed Income
a. HYG – iShares iBoxx $ High Yield Corp Bd ETF
b. ISTB – iShares Core 1-5 Year USD Bond ETF
c. LQD – iShares iBoxx $ Invmt Grade Corp Bd ETF
d. ILTB – iShares Core 10+ Year USD Bond ETF

a. DBA – Invesco DB Agriculture Tracking ETF
b. DBC – Invesco DB Commodity Tracking ETF
c. GLD – SPDR Gold ETF
d. IYR – iShares US Real Estate ETF
You may assume that all investments will be held in a qualified tax-exempt retirement account so that taxes will only be based on capital gains at 70 (the mandatory liquidation date of such accounts), with a flat capital gains tax rate of 30%.
You need to consider four scenarios (in all four scenarios, the family has the traditional blindness towards whether their child is highly intelligent and has told you to assume the child will obtain a free university education – despite you advising otherwise):
Scenario Partner Common Age Child Age
One 25 3
Two 30 2
Three 35 1
Four 40 1


Assume that you take a traditional Beta Management approach only. Provide a recommended Beta target and weighting across the possible asset classes (including the housing unit) for each scenario. Be sure to provide a complete discussion to explain your asset weightings.


Use the efficient frontier (one with only traditional equity and a fixed income versus a second with modern equity, fixed income and alternative investments) and recommend a target portfolio (including the housing unit) for each scenario. Be sure to provide a complete discussion to explain your asset weights.


If you cannot complete Part Two, assume weights and continue. For each scenario, use a Monte Carlo simulation (one year in the future) to develop a distribution or rate of returns to show to the clients to visually present the rate of return, risk, skew and kurtosis of the recommended portfolio and provide an explanation to the client. One needs to be done for the traditional approach and modern approach.


Assume that the client is happy with the portfolio provided in Part Three. For each scenario and each approach, provide

The level (annual) payment the client must provide to support retirement

The probability that the client will have only $2 million at retirement.

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