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 26. The characteristics for four model portfolios follow:

ASSET MIX
Portfolio	Stock		Bond		ER		2
1	10	%	90	%	9	%	6	%
2	22		78		10		11
3	61		39		11		15
4	87		13		12		24

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

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.

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.