Reading 26: Asset Allocation LOS m～ Q9-10

regarding, following, efficient, available

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

Corner Portfolio	Expected Return	Exp. Std. Dev.	Asset Class Weights
Corner Portfolio	Expected Return	Exp. Std. Dev.	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
	Asset Class	Expected Return	Exp. Std. Dev.	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
Corner Portfolio	Expected Return	Exp. Std. Dev.	Sharpe Ratio	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%