| Course | MT423 Asset Allocation and Risk Management |
|---|---|
| Unit | Unit 3 |
| Paper type | Risk capacity analysis |
| Length | About 940 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Business Administration |
| Updated | October 2026 |
Free sample paper for MT423 Unit 3
28.3 Percent Now, 22.5 at 65: An MT423 Unit 3 Risk Capacity Analysis Built From the Balance Sheet
[Student Name]
Purdue University Global
MT423: Asset Allocation and Risk Management
Unit 3 Risk Capacity Analysis
[Instructor Name]
[Date]
Denise Hartley and her finances are composite; the Social Security figure stands in for the estimate on her own statement, the real return assumptions are stated, and the sources cited are real.
The Balance Sheet
Denise's investable assets total $605,000: $420,000 in a SEP-IRA, $64,000 in a Roth IRA and $121,000 in a taxable brokerage account. She also keeps $45,000 in a savings account as a business and household reserve. The reserve is excluded from investable assets because it is there to cover lean months in her work, and counting it would let the analysis spend money she needs for a different purpose. She has no mortgage and no other debt.
The Income Record
As a freelance court reporter, Denise is paid per page and per appearance by law firms and courts. Her net self-employment income over the last five years ran between $71,000 and $118,000. She plans to keep working until 65 and to save $25,000 a year until then, which her lowest recent year could still support. Her income moves with litigation volume rather than with the stock market; it fell in 2020 when courts closed, but in most years it is not tied to stock prices. Cocco et al. (2005) treat labor income of this kind as a bond-like asset that supports taking market risk, though its volatility means it supports less than a steady salary would.
The Retirement Target
Denise wants to spend $62,000 a year in today's dollars from age 65. Her Social Security statement estimates a benefit of about $2,650 a month, or $31,800 a year, at her full retirement age of 67 (Social Security Administration, 2025). For the two years from 65 to 67, her savings must supply the full $62,000. From 67 on, they supply $30,200 a year. The first two withdrawals are about twice the later ones, which makes the bridge years the most demanding part of the plan.
All figures are in today's dollars, and every return below is a real return, after inflation. Mixing nominal returns with a real spending target would make the plan look better funded than it is.
What the Target Is Worth at 65
Each yearly draw from 65 through 95 is taken on the first day of that year and discounted back to her 65th birthday at an assumed 2.5 percent real rate. The two bridge years contribute about $122,500 and the twenty-nine later years about $602,600. The total present value of the need at 65 is $725,119.
What Her Assets Will Be Worth at 65
Her current $605,000, grown at an assumed real return of 3.0 percent for seven years, reaches $744,074. Her planned savings of $25,000 a year for seven years, growing at the same rate, add $191,562. Together, her resources at 65 are projected at $935,635. Her funded ratio, resources divided by need, is 1.29: she is projected to have about 29 percent more than her target requires.
The Loss Limit
Capacity is the largest loss her assets could take without pushing the funded ratio below 1.0.
At 65, the surplus is $935,635 minus $725,119, or $210,516, which is 22.5 percent of her projected resources. A fall larger than that at retirement would leave her short.
Today, only her current assets are exposed to the market; her future savings have not been invested yet. To remain funded, her current assets must be at least the amount that, grown for seven years, plus the projected savings, covers the need: $725,119 minus $191,562, divided by 1.03 to the seventh power, which is $433,831. She could therefore lose up to $171,169, or 28.3 percent of today's $605,000, and still be on track.
Denise is willing to watch a $180,000 fall, but her finances can absorb only $171,169 of it today.
Sensitivity
A single limit presented as exact would be misleading, so four assumptions are varied one at a time. If the real discount rate is 2.0 percent rather than 2.5, the need rises to $769,549 and today's limit falls to 22.3 percent. If she lives to 100 rather than 95, the need rises to $792,008 and the limit falls to 19.3 percent. If her assets grow at 2.0 percent real rather than 3.0, the limit falls to 22.4 percent. If her Social Security benefit is cut by 20 percent, the need rises to $852,031 and the limit falls to 11.2 percent.
Her capacity is therefore best described as a range of roughly 19 to 28 percent of current assets under plausible assumptions, with a severe benefit cut as the main risk that would shrink it much further.
What Raises Capacity
Two choices within her control would widen the margin. Working one more year, to 66, removes one bridge year and adds a year of saving; Bodie et al. (1992) showed that the flexibility to work longer is itself a form of insurance that allows more market risk earlier in life. Lowering her spending target by $3,000 a year would also raise her capacity. Neither is proposed here; they are recorded for the allocation discussion.
Conclusion
Denise's capacity limit is 28.3 percent of current assets in the base case, falling to 22.5 percent at 65, with a plausible range down to about 19 percent. Her tolerance, from Unit 2, is $180,000, or 29.8 percent. Capacity is slightly lower and therefore binds, and the strategic allocation in Unit 5 should be built to keep a severe market loss inside it.
References
Bodie, Z., Merton, R. C., & Samuelson, W. F. (1992). Labor supply flexibility and portfolio choice in a life cycle model. Journal of Economic Dynamics and Control, 16(3-4), 427-449. https://doi.org/10.1016/0165-1889(92)90044-F
Cocco, J. F., Gomes, F. J., & Maenhout, P. J. (2005). Consumption and portfolio choice over the life cycle. Review of Financial Studies, 18(2), 491-533. https://doi.org/10.1093/rfs/hhi017
Social Security Administration. (2025). Retirement benefits (Publication No. 05-10035). https://www.ssa.gov/pubs/EN-05-10035.pdf
What the MT423 Unit 3 assignment asks for
The third unit asks students to measure a client's capacity for loss from her finances rather than her attitudes. Instructors expect a balance sheet of investable assets, an account of income and its stability, and a retirement target in today's dollars with a sourced Social Security estimate. The target should be valued at retirement by discounting each year's withdrawal, with any years before benefits begin treated separately because they are larger. Projected resources at retirement should include planned saving. Capacity is the largest loss the client's current assets could take while the plan stays funded. Real and nominal figures must not be mixed. Most sections want the limit stated now and at retirement, and tested against a few changed assumptions so it ends as a range.
How the MT 423 Unit 3 example is put together
This sample opens with the balance sheet and explains why the reserve is excluded. An income section describes her uneven freelance earnings and, through Cocco and colleagues, how such income supports some market risk. The target section separates the two bridge years from the later ones, cites her benefit statement and states that every figure is real. The need is valued at 65, resources are projected, and the funded ratio follows. The loss limit is computed at 65 and today, under a highlighted line setting her $180,000 tolerance beside her $171,169 capacity. Four sensitivity tests change one assumption each. A section on working longer cites Bodie and colleagues, and the conclusion names capacity as the binding constraint.
Where the points sit in the MT423 Unit 3 rubric
Capacity analyses are typically graded on a correct balance sheet, a target valued properly at retirement, consistent use of real figures, a computed loss limit and a test of how that limit moves. Inferring capacity from the questionnaire, or describing it in the same adjectives as tolerance, collapses the distinction the unit is built on. Rubrics check for real and nominal figures mixed in one calculation. Credit goes to treating bridge years before Social Security separately, since they carry larger withdrawals. Recognizing that future saving is not exposed to today's market shows care. A limit presented with a range from sensitivity tests earns more than one presented as exact. A sourced benefit estimate and clear tables round out the expectations.
MT423 Unit 3 help from the desk
Many weak capacity papers restate the client's risk score and call it capacity. Another frequent error applies a flat replacement ratio to final salary and ignores the gap years before Social Security, which here require twice the later withdrawal. Students often grow assets at a nominal return while valuing a target in today's dollars, which makes the plan look better funded than it is. Some treat future savings as if they would fall with the market today, which overstates the damage of a loss now. Many give one limit with no test. Before submitting, rerun the limit with the benefit cut by a fifth and with the client living five years longer. If either result surprises you, the conclusion should say which assumption the plan depends on.
Get an MT423 Unit 3 example written to your instructions
Capacity analyses rest on a client's own figures. From the balance sheet, income and goal in the Unit 3 case, the free first MT423 sample solves the loss limit now and at retirement, then tests it for sensitivity, in the rubric's format. Allow 24-48h; missing inputs become labeled assumptions rather than guesses. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
More MT423 papers and BS in Business Administration samples
- MT423 Unit 1: Downturn Exit Board Post
- MT423 Unit 2: Risk Tolerance Assessment
- MT423 Unit 4: Asset Class Review
- MT423 Unit 5: Strategic Allocation Proposal
- MT423 Unit 6: Seminar Reflection
- MT423 Unit 7: Glide Path Design
- MT423 Unit 8: Stress Test Report
- MT423 Unit 9: Sequence Risk Illustration
- MT423 Unit 10: Rebalancing Policy
- MT422 Unit 3: Two-Asset Portfolio Problem
- MT421 Unit 3: Net Worth Statement
- MT400 Unit 3: Process Prioritization Matrix
MT423 Unit 3 questions, answered
Is risk capacity the same as the required return?
No, though they are related. Required return asks how much the portfolio must earn to reach a goal; capacity asks how much it can lose and still reach it. A client can need little return and still have limited capacity if a loss arrives just before withdrawals begin. Reporting both gives the allocation two anchors.
What if the client is already on track without much growth?
Say so, because it changes the conversation. Here, even a zero real return turns 605,000 plus seven years of saving into 780,000, above the 725,119 target. A client in that position has little need to take risk, which can justify a more conservative mix than capacity alone would allow, provided the paper explains the trade in return it accepts.
Which discount rate should the analysis use?
A real rate consistent with the conservative end of the portfolio's expected return, stated as an assumption with its basis. Because the result is sensitive to it, a table showing the loss limit at two or three rates usually earns more credit than a single figure defended at length, and it shows how much of the conclusion rests on one assumption.
Where can I find a free MT423 Unit 3 sample paper?
The complete MT423 Unit 3 analysis is here, computing a composite court reporter's loss limit from her balance sheet, income and retirement target.
Which assumption shrinks capacity most in the MT423 Unit 3 sample?
A 20 percent cut in her Social Security benefit, which raises the need to $852,031 and cuts today's limit from 28.3 to 11.2 percent.