Question
As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for
As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 7, while Mr. B has a risk-tolerance factor of 22. The characteristics for four model portfolios follow:
ASSET MIX | ||||||||
Portfolio | Stock | Bond | ER | 2 | ||||
1 | 7 | % | 93 | % | 9 | % | 6 | % |
2 | 20 | 80 | 10 | 9 | ||||
3 | 70 | 30 | 11 | 15 | ||||
4 | 80 | 20 | 12 | 24 |
Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places.
Portfolio | Ms. A | Mr. B |
1 | ||
2 | ||
3 | ||
4 |
Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B?
Portfolio -Select-1234Item 9 represents the optimal strategic allocation for Ms. A. Portfolio -Select-1234Item 10 is the optimal allocation for Mr. B.
For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 4 as her strategic allocation? Round your answer to the nearest whole number.
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