Problem
Scenario
You are preparing an investment recommendation for a client review at a wealth management firm. The client wants the portfolio to support a 6.0% annual return objective, keep at least $300,000 available for near-term liquidity needs, and stay within a maximum annual volatility of 10%. You have narrowed the discussion to three Merrill-advised allocation options and need to decide which recommendation best aligns with the client's stated goals using a clear, numbers-based framework.
Financials
| Metric | Portfolio A | Portfolio B | Portfolio C |
|---|---|---|---|
| Expected annual return | 5.4% | 6.3% | 7.1% |
| Expected annual volatility | 7.0% | 9.5% | 12.0% |
| 1-year downside scenario | -4.0% | -8.0% | -13.0% |
| Liquid allocation | 40% | 25% | 15% |
Additional inputs: client investable assets = $1,200,000; minimum liquidity need = $300,000; required return objective = 6.0%; maximum volatility tolerance = 10.0%.
Question
Which portfolio would you recommend, and how would you show that your recommendation aligns with the client's return, liquidity, and risk goals? If no option is a perfect fit, explain the trade-off you would present and the adjustment you would suggest.
What to Evaluate
- Return objective versus expected portfolio return
- Liquidity need in dollars versus liquid allocation
- Risk tolerance versus expected volatility
- Trade-offs if no portfolio clears every constraint
Key Inputs
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