There is a whole section of 3 questions before this last question. i am doing a

Question

There is a whole section of 3 questions before this last question. i am doing a report based on a simulation model for a salary & portfolio growth using fixed anual rates for 20 years. Then we did a model again but with random growth rates(using RAND()). we repeated it 10 times with diffrent rand values. There was a huge impact on the protfolio value(end balance at the end of the 20 years), it kept on going up and down.

A, What percentage of the time is the $1,000,000 goal met? Out of the 10 trials, the end balance (portfolio value) has exceeded or equaled to 1,000,000 4 times. Hence showing a 40% success.

B, What is the mean 20-year portfolio value? $983,400.58

C, What is the standard deviation? 186,084.72

D, What is the maximum? $1,270,513.16

E, What is the minimum? $686,368.62

(This is the question i cant answer) -What recommendation do you have for employees with a current profile similar to Tom’s after seeing the impact of the uncertainty in the annual salary growth rate and the annual portfolio growth rate?

Can you just give me a general answer if you dont understand the specifics. i just dont know how to word the answer to this question properly

Explanation / Answer

There is variability in the salary and the portfolio growth rates which resulted in just 40% chances of success in meeting the $1,000,000 goal. In order to reduce this uncertainty and increase chances of meeting the Goal it’s advisable to people like Tom facing these uncertainties to deposit some part of the portfolio in the risk free assets and to diversify the portfolio as much as he can by investing in the different asset classes. Diversification in different assets would reduce his standard deviation or the risk/uncertainties in achieving the portfolio goal of $1,000,000. Also that the portfolio's Sharpe ratio should be maximized that is the return to the standard deviation ratio should be maximized. Thus create an optimal risky portfolio with the maximum Sharpe ratio with different types of asset classes being invested combine this with the risk free asset to get the portfolio with risk as desired by Tom.

It would also be advisable Tom could also consult a financial advisor to invest the portfolio with the Goal of $1,000,000 in mind. The advisor would suggest him to invest the portfolio in the risk free asset as well as different other asset classes such that the diversification of the portfolio is achieved.

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