Questions 19(134093) through 24(184095) relate to Reading 12 Doyce Asset Management (DAM) Case Scenario Norma Watts is a portfolio manager serving Doyce Asset Management (DAM), an asset management firm situated in the emerging market country of Zaelo. Watts manages the policy portfolio of Guiness Fund which has been established by Zaelo's government authorities to fund the extraction of mineral reserves. Watts has summarized the following facts concerning the fund and investment portfolio: The present value of expected revenue from the sale of mineral reserves is 2L 50 million . Zaelo's government operates under constrained financial conditions and mineral extraction is an expensive process. At present the fund holds ZL 22 million in external borrowings. . Guiness Fund's financial assets are currently worth ZL 80 million All investments are tax-exempt . Revenue generated from the fund will be used to fund local infrastructure development. The present value of distribution amounts is estimated at ZL 15 million. . Infrastructure costs are expected to grow at an inflation rate of 28% per year for the next fifteen years. The current allocation for the fund is 50/50 equity and fixed-income, respectively. Watts is considering a reallocation of assets and is evaluating the asset-only and liability-relative approaches for the purpose Exhibit 1 summarizes data relevant to the current and proposed allocations. Exhibit 1: Current and Proposed Asset Allocations Current Allocation Proposed Asset Allocations A B C Equity: Domestic (96) 50 30 30 25 Foreign (90) 20 25 25 Total equity (9%) 50 50 55 50 Fixed income (96) 50 30- 15 25+ Diversifying strategies (9%) 20 30 25 Sharpe ratio 0.450 0.652 0.78 8 0.700 Volatility (96) 12 15 18 17 Securities match liability risk exposure: After considerable deliberation, Watte selects the liability relative approach for revising the strategic asset allocation and selects allocation A based on the following factors: Factor 1: Fixed-income investments match liability risk exposures Factor 2: Fixed-income securities are equal to ZL 24 million and thus exceed the fund's financial liabilities of ZL 22 million