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Questions 1(134473 ) through 6(134478 ) relate to Reading 18 Mark Reid Case Scenario Mark Reid is an asset advisor at SouthWest Asset Management (SWAM

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Questions 1(134473 ) through 6(134478 ) relate to Reading 18 Mark Reid Case Scenario Mark Reid is an asset advisor at SouthWest Asset Management (SWAM ). Reid is designing an asset allocation for two defined benefit pension plan's respectively operated by his clients , Joyce Manufacturing (JM ) and Regale Corporation (RC ). He begins by collecting details on both pension plans in Exhibit 1 below : Exhibit 1: Defined Benefit Pension Plans JM RC Funding ratio 0.75 1.00 Equity allocation 50 80 Fixed -income allocation (% ): Corporate bonds 20 20 Alternative investments allocation (%) 30 Time horizon of plan liabilities 20 years 15 years Average duration of bond assets 15 years 16 years Total value assets $500 million $25 million As part of his analysis , Reid also summarizes the investment objectives of the pension funds as follows : JM : To reduce surplus risk RC : To minimize long-term future contributions , convert to an annuity plan , and maintain portfolio volatility Reid sits down with the RC's chief financial officer to discuss the plan's asset allocation . His agenda is to focus on the following two items : Item 1: Propose an allocation to alternative investments identical to JM . This will be achieved by liquidating a portion of the equity allocation and re-investing the proceeds in alternative investments Item 2: Consider the impact of taxes on the asset allocation (Exhibit 1) by analyzing a breakdown of pre -tax returns and standard deviations (Exhibit 2) and correlations (Exhibit 3). Exhibit 2: Pre -tax Returns and Standard Deviations of RC's Asset Allocation Pre -tax Pre -tax Asset Class Expected Standard Tax Rate Return (%) Deviation (%) (% ) Investment grade (IG ) corporate bonds 18 50 High yield (HY ) corporate bonds 13 19 50 Equities 20 25 30

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