1. (Asset Allocation) If 85% of the financial assets are invested in stocks and 15% of the financial assets are invested in bonds, the expected total risk of this 85/15 portfolio is closest to:

1. 10.68%
2. 10.70%
3. 10.72%
4. 10.74%
5. 10.76 %

2. (Investment Policy Slides 1 to 45 only) The clients nominal pre-tax return required is closest to:

1. 4.4%
2. 5.8%
3. 6.4%
4. 9.1%
5. 10.3%

Use the 4 Steps for Asset Allocation for an Individual Investor and the information about the individual client below to help answer questions 28-32 Currently (T=0), the client has $275K in financial assets, but needs $1,000K to retire in 30 years (T=30) No additional contributions to financial assets will be made from now until retirement Any capital gains on the financial assets will be taxed at 30.0% Inflation is forecasted to be 2.0% per year The client will invest their financial assets in either stocks or bonds Stocks are expected to return 17.0% with 12.0% of total risk Bonds are expected to return 8.0% with 5.0% of total risk The correlation of stocks and bonds is assumed to be 0.65 The risk free rate is 2.5% You are trying to help the client decide between 11 different portfolios with the following weights of stocks and bonds: Portfolio Weight Stock Weight Bond Port. Return Port Risk Sharpe Ratio 100% 0% 17.00% 12.00% 1.2083 90% 10% 16.10% 1.2218 3 80% 209115.20 15.20% 2 1.2356 70% 14.30% 9,44% 1.2495 60% 40% 13.40% 8.63% 1.2623 50% 50% 12.50% 7.86% 1.2726| 7 40% 60% 11.60% 7.12% 1.2773 30% 70% 10.70% 6.45% 1.2715 9 20% 80% 9.80% 5.85% 1.2475 10 10% 90% 8.90% 5.36% 1.1944 11 0 % 100% 8.00% 5.00% 1.1000 21 30. (Investment Policy - Slides 1 to 45 only, Risk/Performance) The client's needs to be assured (with 90% statistical certainty) that their financial assets will not decline (or return