A Strategic Asset Allocation (SAA) for an Endowment has been created and consists of 40% allocation to the domestic bond market and 60% allocation to the domestic equity market.

Based on historical 20 year data, the average volatility and return for the two asset classes and the SAA are as follows (all figures have been annualized and in real terms):

	Bonds	Equities	SAA
Returns	1.5%	8.3%	5.58%
Volatility	2.2%	13.7%	9.5%

Back-Testing or Out-of-Sample Testing a SAA using real returns for the portfolio, a Notional Dollar starting portfolio value and taking into account an annual spend and fees can provide additional information regarding the suitability of the SAA to achieve investment objectives. Explain why analysts should test the portfolio/SAA using Real Returns, Notional Dollars and Spend instead of only considering portfolios historical average return to evaluate the suitability of the portfolio/SAA? Further explain what specific information is obtained regarding (i) the ability to achieve investment return objective; and (ii) the ability to bear investment risk objective.