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 7, 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	10	%	90	%	7	%	7	%
2	24		76		8		12
3	62		38		9		16
4	87		13		10		25

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 (--------) represents the optimal strategic allocation for Ms. A. Portfolio (-----------) 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 (------------).

Problem 11-07

Consider the annual returns produced by two different active equity portfolio managers (A and B) as well as those to the stock index with which they are both compared:

Period	Manager A		Manager B		Index
1	12.3	%	13.0	%	11.3	%
2	-3.0		-3.2		-2.1
3	15.0		14.0		18.9
4	0.3		1.8		-0.5
5	-7.7		-5.7		-3.8
6	23.6		24.7		21.7
7	-11.8		-11.4		-14.0
8	5.0		5.2		5.2
9	3.4		4.3		2.1
10	19.6		18.3		19.5

1. Did either manager outperform the index, based on the average annual return differential that he or she produced relative to the benchmark? Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to two decimal places.

Manager A: (------) %

Manager B: (-------) %

(-----------------)'s average return is less than the index and (----------------)'s average exceeded that of the index.

b. Calculate the tracking error for each manager relative to the index. Which manager did a better job of limiting his or her client's unsystematic risk exposure? Do not round intermediate calculations. Round your answers to two decimal places.

1. Manager A: (---------) %

   Manager B: (-----------) %

   (-------------) did the better job of limiting the client's exposure to unsystematic risk as the difference between manager's returns and those of the index has (------------) standard deviation.