Part (2) Global Bond Asia-Ex Japan US REITS < (a) Buy and Hold < Allocation Year 1 < Year 2 Year 3 Year 4 40% 4.8% < 6.9% 5.5% 2.0% < 40% -35.0% < 56.0% 19.9% -17.1% < 20% -20.0% < 28.6% < 15.0% 8.7% < Return of Global Bond = (1+4.8%) * (1+6.9%) * (1+5.5%) * (1+2%) 1 = 20.5568% < Return of Asia-Ex Japan = (1-35%) * (1+56%) * (1+19.9%) * (1-17.1%) - 1 = 0.78866% Return of US REITs = (1-20%) * (1+28.6%) * (1+15%) * (1+8.7%) 1 = 28.6051% < - Total return = 0.4 * 20.5568% +0.4 * 0.78866% +0.2 * 28.6051% = 14.2592% < (b) Systematic rebalance at teach calendar year end Return of Global Bond = 4.8% + 6.9% + 5.5% +2% = 19.2% < Return of Asia-Ex Japan = -35% + 56% + 19.9% -17.1% = 23.8% < Return of US REITs = -20% + 28.6% +15% + 8.7% = 32.3%% < < Total return = 0.4 * 19.2% +0.4 * 23.8% +0.2 * 32.3% = 23.66% < < 17/20 -3 < Comparison: We can see that when that particular asset class is performing well, e.g. Global Bond, a buy- and-hold strategy gives a higher return, strategic rebalancing will lower the return. Since it is performing well, keeping its weight does not give additional credit to the portfolio. < But for poorly performing assets, e.g. Asia-ex Japan, having a strategic rebalancing gives a poor result, since its weight does not drop. < Overall, buy-and-hold gives a better result if the portfolio is performing well Part (2) Based on the following asset class performance and allocation, < calculate and compare the results at the end of year 4 based on < (a) Buy and Hold (b) Systematic Rebalance at each calendar year end. < Global Bond Asia-Ex Japan US REITS Allocation Year 1 < 40% 4.8% < Year 2 Year 3 Year 4 6.9% 5.5% 2.0% < 40% -35.0% < 56.0% 19.9% -17.1% 20% -20.0% < 28.6% < 15.0% 8.7%