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:

You have already determined that the expected return and standard deviation for the Current Allocation are: $E(R_{\text{c}\text{u}\text{r}\text{r}\text{e}\text{n}\text{t}})=7\mathrm{.}75$ percent and ${}_{\text{c}\text{u}\text{r}\text{r}\text{e}\text{n}\text{t}}=10\mathrm{.}000$ percent.

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

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

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c$.$ For both the Current and Proposed Allocations, calculate the expected risk premium per unit of risk $($that is$,\{$:$\frac{E(R_p)-RFR}{}).$ Do not round intermediate

calculations. Round your answers to three decimal places.

Current Allocation:

Proposed Allocation:

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

The

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