Given the existing allocations, the best of the three choices in terms of risk and reward is to reduce the Treasury bonds and emerging markets stocks while increasing domestic large cap securities. The Treasury bond allocation should be reduced because the income and diversification benefits of fixed income securities are not a priority; the low returns and yields are sub-optimal for the surplus portfolio. U.S. T-bonds also have inflation and interest rate risk.
The surplus segment can tolerate higher risk to achieve higher returns and provide inflation protection. For these reasons the overall equity allocation should be increased. Currently, there is a significant allocation to U.S. small cap stocks therefore the U.S. large cap allocation should be increased.
The allocation to emerging markets is too high. While the ability to target maximum returns exists, the emerging markets allocation should be reduced to a more reasonable level. Otherwise, the surplus may be subject to greater than desired levels of volatility
