WMCP cheat sheet

Goal-based planning converts household objectives into time-dated cash-flow targets, then solves for required saving, asset allocation, and monitoring thresholds.

Funding ratio = present value of assets dedicated to a goal ÷ present value of the goal liability; a ratio below 1.0 indicates a funding gap.

For level end-of-year deposits, PMT = (FV × r) ÷ ((1 + r)^n − 1) when r > 0; when r = 0, PMT = FV ÷ n.

Present value of a future goal = FV ÷ (1 + r)^n; use a real return when the goal and cash flows are stated in today's dollars.

Risk tolerance is willingness to bear risk; risk capacity is ability to bear risk from cash flow, horizon, liquidity, and human capital; allocation is constrained by the lower of the two.

Human capital = present value of expected future labor income; younger households usually have more human capital and can support greater growth-asset exposure, all else equal.

Prioritize goals by essentiality and time horizon; fund essential near-term goals with lower-volatility assets before discretionary long-term goals.

Monte Carlo analysis simulates many return paths to estimate the probability that goals are funded; results depend on assumptions and are not guarantees.

Review triggers include changes in income, health, family status, tax law, spending, or a funded ratio outside its tolerance band.

Expected portfolio return = weighted average of asset expected returns: E(Rp) = Σ wi E(Ri), where the weights sum to one.

Two-asset portfolio variance = w1²σ1² + w2²σ2² + 2w1w2ρ12σ1σ2; lower correlation reduces variance for given weights and volatilities.

The efficient frontier is the set of portfolios with the highest expected return for each risk level; mean-variance investors choose a frontier portfolio matching their utility.

Sharpe ratio = (Rp − Rf) ÷ σp; it measures excess return per unit of total portfolio risk.

Treynor ratio = (Rp − Rf) ÷ βp; it measures excess return per unit of systematic risk and is useful for well-diversified portfolios.

Jensen's alpha = Rp − [Rf + βp(Rm − Rf)]; positive alpha indicates return above the CAPM-required return for the portfolio's beta.

CAPM: E(Ri) = Rf + βi[E(Rm) − Rf]; beta measures sensitivity to market risk, and only systematic risk is compensated in equilibrium.

Diversification reduces unsystematic risk through imperfectly correlated assets; systematic market risk remains and is compensated in equilibrium.

A rebalancing policy sets calendar or threshold rules to restore target weights; it controls risk drift rather than forecasting returns.

An investment policy statement records goals, constraints, risk tolerance, target allocation, allowable ranges, rebalancing rules, and review procedures.

IPS constraints include liquidity needs, time horizon, tax circumstances, legal and regulatory requirements, and unique investor circumstances.

Withdrawal sustainability depends on withdrawal rate, return, inflation, volatility, horizon, and sequence of returns.

Sequence-of-returns risk is the danger that poor early retirement returns reduce portfolio longevity even when long-run average returns match the plan.

Tax diversification across taxable, tax-deferred, and tax-free accounts increases flexibility for withdrawals, Roth conversions, and tax-bracket management.

Estate planning coordinates wills, trusts, beneficiary designations, powers of attorney, and health care directives.

Insurance transfers low-probability, large-loss risks to an insurer; deductibles and coverage limits balance premiums paid against risk retained.

Family governance clarifies decision rights, communication, philanthropy, and succession, supporting wealth transfer across generations.

Behavioral biases such as loss aversion, recency, overconfidence, and anchoring can distort rebalancing, spending, and risk decisions.