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QUESTION 2 HAS FOUR PARTS FOR A TOTAL OF 22 MINUTES

2. HH Counselors has developed five alternative asset allocations (shown in Table II on page

7) for client portfolios.

f

I

Answer the following . questions t>a,sed on Table II, the Introduction on page 4, and the

Investment Policy Statement you created for Firfax in Question 1 - Part A.

A.

B.

Determine which of the asset allocations in Table II meet or exceed Fairfax's

stated return objective. Show any calculations.

\ .

(6 minutes)

Determine the three asset allocations in Table II that meet Fairfax's risk tolerance

cntenon. Assume a 95% confidence interval is required; with 2 standard

deviations serving as an approximation of that requirement Show any

calculations.

(6 minutes)

C. Assume that the risk-free rate is 4.5%;

i. Calculate the Sharpe Ratio for Asset Allocation D. Show your

calculations. (Your answer should be calculated to 3 decimal places.)

ii. Determine the two asset allocations in Table II having the best riskadjusted

returns, based only on the Sharpe Ratio measure.

(4 minutes).

Recommend and justify the one asset allocation in Table II you believe would

be the best model for Fairfax's Savings portfolio. (Your recommendation must be

consistent with yc;,ur answer to Parts A through C above.)

(6 minutes)

Table Il

HH Counselors

~:;_ ALTERNATIVE A~~ET ALLOCATIONS

.. Project~ Expected ~t Asset . Asset Asset Asset

Total Standard Allocation Aliocatiori . Allocation Allocation Allocation

A~t Cla~ Return Deviation A B C D E

_C,~h .. ' 4.5% 2.5% 10% 20% 25% 5% 10%

Equivalents

Corporate 6.0% 11.0% 0% 25% 0% 0% 0%

Bonds

Municipal 7.2% 10.8% 40% 0% 30% 0% 30%

Bonds .,

Large Cap; 13.0% 17.0% 20% 15% 35~i 2.5% 5%

U.S. Stocks

Small Cap. 15.0% 21.0% 10% 10% 0% 15% 5%

U.S. Stocks

International 15.0% 21.0% 10% 10% 0% 15% 10%

Stocks

(EAFE)

Real Estate 10.0% 15.0% 10% 10% 10% 25% 35%

Invest Trust's

(REITS)

.V.. .e.n. tu.re. 26.0% 64.0% 0% 10% 0% 15% 5%

Capital '

..

Total 100% 100% 100% 100% 100%

,.

SUMMARY DATA

Asset ~ ~t Asset Asset

Allocation AtlQCation Allocatio .. Allocation Allocation

A B C D E

Projected Total Return 9.9% 11.0% 8.8% 14.4% 10.3%

~ I

Projected After-tax Total Return 7.4% 7.2% 6.5% 9.4% 7,4%

1i Expected Standard Deviation 9.4% 12.4% 8.5% 18.1% 10.1%

Sharpe Ratio 0.574 0.524 0.506 ? 0.574

(Please