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Problem $6-09$

As chief investment officer of a small endowment fund, you are considering expanding the fund$$s strategic asset allocation from just common stock $($CS$)$ and fixed$-$income $($FI$)$ to include private real estate partnerships $($PR$)$ as well:

Current Allocation: $70$ percent of Asset CS$,30$ percent of Asset FI

Proposed Allocation: $60$ percent of Asset CS$,20$ percent of Asset FI$,20$ percent of Asset PR

You also consider the following historical data for the three risky asset classes $($CS$,$ FI$,$ and PR$)$ and the risk$-$free rate $($RFR$)$ over a recent investment period:

rij:

Asset Class E$($R$)\backslash$sigma CS FI PR

$$S $8\mathrm{.}4\%16\mathrm{.}8\%1\mathrm{.}0$

FI $5\mathrm{.}88\mathrm{.}10\mathrm{.}21\mathrm{.}0$

PR $7\mathrm{.}311\mathrm{.}50\mathrm{.}50\mathrm{.}11\mathrm{.}0$

RFR $2\mathrm{.}9$

You have already determined that the expected return and standard deviation for the Current Allocation are: E$($Rcurrent$)=7\mathrm{.}62$ percent and $\backslash$sigma current $=12\mathrm{.}475$ percent.

Calculate the expected return for the Proposed Allocation. Round your answer to two decimal places.

$\%$

Calculate the standard deviation for the Proposed Allocation. Do not round intermediate calculations. Round your answer to two decimal places.

$\%$

For both the Current and Proposed Allocations, calculate the expected risk premium per unit of risk $($that is$,[$E$($Rp$)-$ RFR$]/\backslash$sigma $).$ Do not round intermediate calculations. Round your answers to three decimal places.

Current Allocation:

Proposed Allocation:

Using your calculations from part $($c$),$ explain which of these two portfolios is the most likely to fall on the Markowitz efficient frontier.

The

$-$Select$-$

is the most likely to fall on the Markowitz efficient frontier.