David Chong is the treasurer and vice chair of the Investment Committee of Chong Foundation, a Singapore foundation with SGD100,000,000 in assets, that supports medical research relating to liver diseases and treatment. For the annual asset allocation review, David has prepared the set of capital market expectations as shown in Exhibit 6 below:

David also notes the following facts: -Chong Foundations spending rate is 3 percent, the expected long term inflation rate is 1.5 percent, and the cost of the investment strategy has averaged 35.5 basis points annually.

-Chong Foundation has a multiplicative return requirement based on the spending rate, the expected inflation rate and the cost of earning investment returns. (a) Describe how corner portfolios arise and explain how to use them in strategic asset allocation. (b) Compute Chong Foundations return requirement (in percent, to two decimal places) and contrast it to an additive return requirement based on the same inputs. (c) Recommend the strategic asset allocation that David should present for approval at the asset allocation review.

Correlation Expected Standard Asset Class Return Deviation 8.6% 20% Domestic equities 1.00 2 Non-domestic equities 6.7% 15% 0.65 1.00 4.1% 3 Bonds 10% 0.34 0.25 1.00 12% 4 Real Estate 5.0 0.50 0.35 0.17 1.00 Exhibit 6: Risk, Return and Correlation Matrix for 4 Assets under Consideration