1. A firm has promised to pay pension benefits, denoted by L, 1 year from now. The pension payment, L, is uncertain, but we are willing to assume that it is normally distributed with a mean $50 million and standard deviation = $2 million.

The firm has pension assets today = $50 million, and its objective is to invest the assets so that it has at least a 95% probability of paying the pension benefits in one year.

It has two investment choices, the returns from which are both normally distributed with the following characteristics:

Expected Standard Deviation Correlation coefficient

Value in 1 year of value in 1 year with Payment in 1 year

Portfolio 1 $54 million $4 million 0.75

Portfolio 2 $54 million $2 million 0.00

Evaluate whether each portfolio meets the objective.