(13 points) You have recently been hired by a wealth management firm and are in charge of designing optimal portfolios for several high-net worth clients. The firm had chosen three ETFs that invest in Domestic Equity (asset A), Foreign Equity (asset B) and Long-Term Bonds (asset C) as well as a Money Market Mutual Fund (asset D) which will serve as the risk-free asset. For these asset classes the research department has provided you with the following assumptions.

Asset Class

Domestic Equity (A) Foreign Equity (B) Long-Term Bonds (C)

Expected Returns

(A) 9.3 % (B) 10.77% (C) 5.2 %

Standard Deviation

(A) 18.5 % (B) 20.4 % (C) 6.8 %

The Money Market Mutual Fund (D) offers expected return is 0.5% (your risk free rate).

And you get the tangency portfolio allocation as the following (portfolio weights and standard deviation):

w(A) -0.05 w(B) 0.20 w(C) 0.85 Sum 1.00 Portfolio Variance 0.0051 Portfolio Standard Deviation 7.14% Portfolio Expected Return ?

1. (10 points) Suppose one of your clients is interested in investing $200 million in a portfolio with an expected return of 12%. What investment would you recommend in each of the asset classes? Give a specific recommendation about what portfolio weight and dollar amount your client should invest in the Money Market Mutual Fund (D), Domestic equities (A), Foreign equities (B) and Long- Term bonds (C). What is the standard deviation of the portfolio that you recommend?