Portfolio C is the most appropriate portfolio for the WWT Pension Plan.  First of all, it exceeds the return requirement of 6.84% by 41 basis points.  It is the most diversified of the portfolio selections, thus providing a means of meeting the primary objective of preserving capital along with inflation protection for the plan assets (30% in stocks, 55% in bonds, 15% in REITs and 5% in T-bills).  There is a moderate allocation of REITs to provide inflation protection and diversification benefits while also providing higher yields than bonds.  This allocation also provides plenty of liquidity to meet the benefit requirements for its retirees.  There is also a larger concentration of corporate bonds in the 5-year time horizon in order to meet the termination requirements of the plan.  Its Sharpe ratio is at the mid-point of all the portfolio selections offering a moderate level of excess returns for its risk level.

Portfolio A is inappropriate because of the higher concentration in stocks (60%) and low concentration in bonds (30%).  Given the low risk tolerance and the short time horizon, this portfolio would be subject to high levels of market risk because of its high stock allocation.  Since the primary goal is capital preservation, the high exposure to stocks makes this portfolio selection risky because of the lack of diversity.

Portfolio B is inappropriate because of the extraordinary high concentration in bonds (85%).  There is a very high concentration in long-term, 10-year bonds (50%) making this portfolio selection particularly sensitive to inflation risk.  This selection also does not meet the return requirement of the pension plan.  Even though it does have the highest Sharpe ratio, the combination of an inadequate return requirement, lack of inflation risk protections, and lack of diversity can influence the plan’s ability to reach its desired goal of fully funded status.