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Problem 11-06

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 8, 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	9	%	91	%	9	%	5	%
2	25		75		10		11
3	68		32		11		14
4	88		12		12		24

1. 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

2. 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.

3. For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 2 as her strategic allocation? Round your answer to the nearest whole number.