Reading 26: Asset Allocation LOS m～ Q9-10 regarding, following, efficient, available

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Q9. The following information is available regarding corner portfolios from an efficient frontier.

Corner Portfolio	Expected Return	Exp. Std. Dev.	Asset Class Weights
			1	2	3	4
1	6.90%	4.60%	0.00%	12.00%	88.00%	0.00%
2	10.00%	8.64%	0.00%	15.00%	45.00%	40.00%
3	13.00%	12.50%	55.00%	0.00%	45.00%	0.00%

An investor has a spending rate of 8%. If inflation is expected to be 3.50% annually and the cost of earning investment returns is 0.5%, which of the following represents the correct weight of one of the asset classes that will at a minimum satisfy the investor’s goals of capital preservation in real terms to an investor with a risk aversion value of 4?

A)   Asset class 3 with weight of 39.00%.

B)   Asset class 2 with weight of 50.00%.

C)   Asset class 1 with a weight of 42.90%.

 

Q10. Based on the following information, compute the weight of US bonds in an efficient portfolio with an expected return of 12.50%?
The following are the long-term capital market expectations:

	Asset Class	Expected Return	Exp. Std. Dev.	Correlations
				1	2	3	4	5
1	US Equity	12.00%	16.00%	1.00
2	US Bonds	8.25%	6.50%	0.32	1.00
3	Intl Equities	14.00%	18.00%	0.46	0.22	1.00
4	Intl Bonds	9.25%	12.25%	0.23	0.56	0.32	1.00
5	Alt Inv	11.50%	21.00%	0.25	0.11	0.08	0.06	1.00

The details of each corner portfolio are given below.

Corner Portfolio	Expected Return	Exp. Std. Dev.	Sharpe Ratio	Asset Class Weights
				1	2	3	4	5
1	14.00%	18.00%	0.639	0.00%	0.00%	100.00%	0.00%	0.00%
2	13.66%	16.03%	0.696	0.00%	0.00%	86.36%	0.00%	14.00%
3	13.02%	13.58%	0.775	21.69%	0.00%	56.56%	0.00%	21.76%
4	12.79%	13.00%	0.792	21.48%	0.00%	52.01%	5.24%	21.27%
5	10.54%	8.14%	0.988	9.40%	51.30%	26.55%	0.00%	12.76%
6	8.70%	6.32%	0.981	0.00%	89.65%	4.67%	0.00%	5.68%

A)   5.75%.

B)   6.25%

C)   6.67%.

sweetgao

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pundit

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pundit

A

zhouyp1982

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miguelliu

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sszzyyll

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dandinghe4748

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