A finished FIN-375 Topic 8 constrained allocation defense example, testing a pre-retiree's allocation against liquidity, horizon, concentration, tax and behavioral constraints and revising it where it fails. Searches like "fin 375 topic 8 assignment example", "fin375 topic 8 sample" and "fin-375 topic 8 example" land here.
What a finished FIN-375 Topic 8 constrained allocation defense looks like
The finished defense states five constraints before any allocation: a 30,000 wedding cost in eighteen months, retirement in five years, 270,000 of employer stock inside the workplace plan, low-basis holdings in the taxable account, and a record of selling after the last market fall, with his own statement that a one-year loss above 100,000 would make him sell again. The first proposal, 45 percent diversified stocks, 45 percent bonds and 10 percent cash, is stress-tested with an illustrative 35 percent stock decline, a 3 percent bond gain and 2 percent on cash, and loses about 127,800. It fails the constraint that decides whether any plan survives contact with a bad year. The revised allocation, 35, 55 and 10, loses about 93,600 in the same test, at a cost of about 0.3 points of assumed expected return a year.
How a FIN-375 Topic 8 example is structured
The defense is organized constraint first, allocation second. It opens with the investor's accounts and the five constraints, each stated as a fact he cannot negotiate away. The first proposal follows, with its assumed returns labeled and the stress test worked in dollars. A section explains why the behavioral constraint governs: an allocation he abandons at the bottom does worse than a more cautious one he keeps. The revised allocation is then tested against every constraint in turn. The wedding money sits in the cash sleeve. The employer stock, which alone would make up most of the revised stock allocation, is sold inside the workplace plan, where sales trigger no current tax, and replaced with a diversified index fund. Low-basis taxable holdings stay in place to avoid realizing gains, and bonds are located in the tax-deferred account. The closing section prices the caution at about 16,500 over five years.
Five constraints stated before any allocation
Liquidity, horizon, concentration, taxes and his own history are listed first, so every later allocation can be checked against something the investor cannot change.
A stress test run in dollars
A 35 percent stock decline costs the first proposal about 127,800, a figure the example sets beside his stated 100,000 limit rather than expressing as a percentage.
Behavior treated as a binding constraint
An allocation abandoned after a fall locks in the loss, so the example lets his record of selling outweigh the higher expected return of the first proposal.
Employer stock sold where it is untaxed
The 270,000 concentration sits inside the workplace plan, so selling it there triggers no current tax, and the proceeds move into a diversified index fund.
The price of caution stated
The revised mix gives up about 0.3 points of assumed return a year, roughly 16,500 over five years, and the example reports that cost openly.
Where marks go in FIN-375 Topic 8
The heaviest deductions go to allocations sized to a return target with the investor's record of selling left unexamined, since a portfolio he dumps during a slump delivers none of the return that justified it. Papers that express risk tolerance as a label, moderate or aggressive, and never convert it into a dollar loss cannot show whether the allocation fits. Leaving the employer stock in place, or counting it as diversified equity, keeps the investor's largest single risk inside a plan that claims to spread risk. Selling low-basis taxable holdings to rebalance, when the same change could be made inside the tax-deferred account, creates needless tax. A defense that tests some constraints and not others, often skipping the near-term cash need, is incomplete. Revising for caution without pricing what it costs leaves the investor unable to judge the trade.
Get a FIN-375 Topic 8 example written to your instructions
Send the FIN-375 Topic 8 instructions and your classroom rubric, with the investor case and constraints your section provides. We write a custom example to them, with constraints listed before any allocation, a stress test run in dollars, the allocation revised where it fails and the cost of the revision priced, in 24 to 48 hours. The first one is free.
FIN-375 Topic 8 questions, answered
Why does the investor's past selling outweigh a higher expected return?
Because an allocation earns its expected return only if it is held. An investor who sells after a large loss realizes that loss and often misses the recovery, which can leave him worse off than a more cautious allocation held throughout. His record is evidence about his real tolerance, so the example sizes the stock allocation to a loss he has said he could live with.
Why sell the employer stock inside the workplace plan?
Because trades inside a tax-deferred account trigger no tax when they happen, so the concentration can be reduced without a tax bill, while selling appreciated shares in the taxable account would realize gains. Some plans allow special tax treatment for employer stock taken out in kind, so the plan documents deserve a check before any sale, since that choice matters for some participants.
Is this allocation advice for my own retirement?
No. The investor, his accounts and every return assumption are composites chosen to show how an allocation is defended against constraints. Your allocation depends on your own accounts, taxes, plan rules, horizon and tolerance for loss. The example demonstrates the reasoning FIN-375 marks at the close of the course and should not be read as investment advice; your actual situation calls for a licensed professional.