Case 2: Asset Allocation for the ASEC Defined-Benefit Pension Plan George Fletcher, CFA, is chief financial officer of Apex Sports Equipment Corporation (ASEC), based in the United States. ASEC is a small company, and all its revenues are domestic. ASEC also has a relatively young staff, and its defined-benefit pension plan currently has no retirees The duration of the plan's liabilities is 20 years, and the discount rate applied to these liabilities is 7.5 percent for actuarial valuation purposes. The plan has $100 million in assets and a $5 million surplus. ASEC's pension plan has above-average risk tolerance. Fletcher has concluded that ASEC's current total annual return objective of 9 percent is appropriate above-average risk tolerance makes it reasonable to attemptto achieve more than the return requirement of 7.5 percent. Exhibit 1 presents the existing asset allocation of ASEC's pension und Exhibit 1: Original ASEC Strategic Asset Allocation Allocation 50% 10 10 20 10 100% 5% 9% 13% 0.31 Asset Class Large-cap U.S. equities Small-cap U.S. equities U.S. 30-day Treasury bills U.S. intermediate-term bonds (5-year duration) U.S. long-term bonds (20-year duration) Total Risk-free rate Expected total portfolio return (annual) SD Sharpe ratio The ASEC pension oversight committee now requests that Fletcher research additional asset classes to include in the strategic asset allocation. The board tells him not to consider US venture capital or real estate at this time. Fletcher conducts his research and concludes that both developed and emerging international markets offer diversification benefits. He constructs the four possible asset allocations shown in Exhibit 2 Exhibit 2: Asset class Allocation Large-cap U.S. equities Small-cap U.S. equities International developed market equities International emerging market equities U.S. 30-day Treasury bills U.S. intermediate-term bonds (5-year duration U.S. long-term bonds (20-year duration) Expected return (annual) 35% 15 15 35% 10 10 50% 10 15 15 20 20 100% 7% 40 9% 9.5% 8.5%